States With No Income Tax (and the Pros and Cons of Living in One)
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To paraphrase Benjamin Franklin: The only two certainties in life are death and taxes.
Every taxpayer in the U.S. has to pay federal income tax, but residents of some states also have to pay a state personal income tax. Taxes are a hassle to file, adding additional financial burden on your wallet. So why live in a state that levies income tax when some states do not tax personal income?
While on the surface, moving to a state without income tax may sound like a no-brainer, it remains the most productive revenue stream for most states. This means when states don't tax income; they must compensate for that lost revenue by raising sales or property taxes and pulling other levers.
In this article
Which states do not tax personal income?
Of the 50 states in the U.S., just nine don't levy an income tax.
- Alaska
- Florida
- Nevada
- New Hampshire (taxes interest and dividend income)
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
Driven by an opportunity to work remotely, millions of people moved during the pandemic. But have these states seen a spike in worker migration? According to United States Postal Service's data, permanent address change requests rose 3.3% between 2019 and 2020, with 2021 only seeing a slight drop over 2020. Most people moved to Sun Belt states, favoring warm regions over congested cities and the chilly climate.
According to the National Association of Realtors, Florida and Texas, two zero-income tax states, saw the most net domestic migration gains in 2022. On the flip side, California and New York, which charge some of the highest state income tax rates, experienced the largest net domestic outmigration.
How do states make money?
States rely on various sources to generate revenue to fund their operations, infrastructure, and services. As noted, income and sales taxes produce the most for state coffers. But those are not the only two items bringing in the money. Corporate income tax and property tax also reel in a huge chunk of revenue for a state. In addition, states drive revenue through fines for violating laws and charges for services like entering a park and lotteries.
Here are a few other ways states make money:
- Federal grants: The federal government gives grants to state governments. This money is used to fund programs such as education and transportation.
- Investments: States invest their funds in various financial instruments, such as stocks, bonds, and real estate, to generate investment income.
- Royalties: Some states earn revenue from royalties on natural resources, such as oil, gas, and minerals extracted from state-owned lands.
Below, we'll examine the largest revenue drivers for states and see if any of the nine states without income taxes make the list.
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Income tax
In the U.S., the Internal Revenue Service (IRS) is responsible for administering federal income tax. In contrast, state and local income taxes are administered by the respective state and local tax authorities. The tax rate is typically progressive, meaning that higher income levels are taxed at a higher rate.
These five states charge the highest income tax:
State | Income tax* |
|---|---|
California | 12.3% |
Hawaii | 11% |
New York | 10.9% |
New Jersey | 10.75% |
Oregon | 9.9% |
* Data collected by The Balance
In no surprise to anyone, California tops this list. The state's tax rate is 12.3%, but it also levies a so-called wealth tax that applies to anyone making $1 million. This takes its tax rate to 13.3%. New York and New Jersey have also implemented this tax. California and New York are among the states that saw an outmigration of people.
Sales tax
A government imposes this tax at the state, county, or local level, and it applies to selling goods and services. It is typically calculated as a percentage of the purchase price of a good or service. The seller collects this tax at the time of sale, which the seller then remits to the government.
Here are five states with the highest sales tax:
State | Sales tax* |
|---|---|
California | 7.25% |
Indiana | 7.00% |
Mississippi | 7.00% |
Rhode Island | 7.00% |
Tennessee | 7.00% |
* Data collected by Tax Foundation.
Only one of these states — Tennessee — doesn't charge income tax. So, while you'll save money come tax season, you'll be dinged at the cash register ... big time! On the flip side, Alaska and Wyoming (two other no-income-tax states) have one of the lowest sales tax rates in the U.S. The former has a combined state and local sales tax rate of 1.76%, while Wyoming has a sales tax of 5.36%.
Property tax
Property tax is imposed on the value of real estate, such as a piece of land and anything built on it, like homes, commercial buildings, and industrial facilities. Property taxes are usually assessed annually and are based on the assessed value of the property as of a specific date.
Top-five states with the highest property tax include are:
State | Property tax* |
|---|---|
New Jersey | 2.23% |
Illinois | 2.08% |
Connecticut | 1.96% |
Vermont | 1.73% |
New Hampshire | 1.61% |
* Data collected by Wallet Hub
Only New Hampshire is among the list of states that doesn't charge income tax. While the state doesn't charge tax on earned income, it does charge tax on interest and dividend income at a flat 5% rate. Nevada, which also doesn't charge income tax, has among the lowest property taxes at 0.48%.
Pros and cons of living in a state without income taxes
Pros
No state income tax
Duh! You have more money in your pocket without a state tax burden denting your wallet. Many states impose a so-called millionaire tax, which means if you're making more than a certain amount, you'll be on the hook for higher taxes. California, for example, charges a 12.3% income tax, which includes a 1% wealth tax. And the top federal income tax bracket is 37%. To put that into perspective, if you're a high-income person living in California, your income tax bill would top 50%. A state with no income tax might be an attractive option for high-income individuals.
Depending on how much you make in a year, you could save significant money, which you could deploy elsewhere. For example, you could use the money saved from the absence of state income tax to repay debt, build an emergency fund, or invest. Heck, you may even treat yourself a little to something special.
Retirement-friendly
A state without income may attract more people looking to cash on that nest egg. As a retiree, you typically have a fixed income. This means every dollar counts, and not having to pay state income tax can help stretch your retirement dollars further. States without income tax can provide a more favorable tax environment for retirement income, such as pensions, Social Security benefits, and retirement account withdrawals. This can result in lower taxes and more disposable income for retirees.
Some states also offer additional tax breaks or incentives for retirees, such as property tax exemptions, sales tax exemptions on certain items, and tax credits for senior citizens. These can further reduce the cost of living for retirees and make a state without income tax even more appealing.
However, there are many factors one should consider before retiring. Cost of living, healthcare facilities, climate, and proximity to family and friends are just a few items to factor in. That said, the absence of state income taxes is a major pull because it allows you to maximize your retirement income and enjoy a comfortable retirement.
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Cons
Higher property and sales taxes
As states lose revenue they otherwise would have generated through income tax, they turn to other measures to compensate for lost revenue. This can take a few forms, such as higher property and sales taxes. In New Hampshire, for example, the property tax is 1.61%. Over in Tennessee, another state that doesn't tax income, the sales tax is among the highest at 7%. You get the point!
Here's a list of no-income-tax states' property and sales taxes:
State | Property tax | Combined state and local sales tax |
|---|---|---|
Alaska | 1.17% | 0% |
Florida | 0.80% | 6% |
Nevada | 0.55% | 8.23% |
New Hampshire | 2.09% | 0.00% |
South Dakota | 1.24% | 6.40% |
Tennessee | 0.66% | 9.55% |
Texas | 1.74% | 8.20% |
Washington | 0.94% | 8.86% |
Wyoming | 0.61% | 5.36% |
Higher sales and property tax can make everyday purchases more expensive. These taxes make it more difficult for some people to afford necessities and may also keep renters from becoming would-be buyers.
Fewer public services
States without income tax often have less money to spend on government services like education, healthcare, and public safety. K-12 runs from kindergarten to 12th grade and is the foundation of any student's academic life. Nevada spends just $9,124 on K-12 per pupil, ranking among the lowest across the U.S., according to data by EducationData.org. Tennessee and Florida also feature in the bottom five, spending $9,942 and $9,983, respectively.
According to Forbes, three states that don't charge income tax — South Dakota, Florida, and Wyoming — are among the most expensive in terms of healthcare affordability. In addition, Nevada, Texas, Washington, Tennessee, and Florida all spend lower on healthcare per capita than the national average of $10,191, according to Kaiser Family Foundation.
Among the nine states without an income tax, only Alaska, Wyoming, and Florida spend more on policing and corrections per capita than the national average, according to MoneyGeek.
Here's how our nine states rank across these three spending categories:
State | K-12 spending per pupil ($13,185 U.S. average) | Healthcare spending per capita ($10,191 U.S. average) | Policing and corrections spending per capita ($655 U.S. average) |
|---|---|---|---|
Alaska | $18,392 | $13,642 | $1,030 |
Florida | $9,983 | $9,865 | $704 |
Nevada | $9,124 | $8,348 | $525 |
New Hampshire | $17,456 | $11,793 | $515 |
South Dakota | $10,326 | $12,495 | $478 |
Tennessee | $9,942 | $9,336 | $515 |
Texas | $9,871 | $8,406 | $547 |
Washington | $14,348 | $9,265 | $608 |
Wyoming | $16,231 | $10,989 | $782 |
Overall, a lack of spending on public services can lead to reduced quality and availability, longer wait times, fewer public school resources, and less public transportation or roads investment. This reduced funding can negatively impact the quality of life for residents.
Limited tax deductions
Another drawback of living in a state without an income tax is that you may be limited in the tax deductions you can claim on your federal income tax return. This is because certain deductions are only available to taxpayers who itemize them. If you don't pay state income tax, you may not have enough deductions to exceed the standard deduction.
A lot to digest? I know, but maybe this example will help clear it up. Homeowners may deduct mortgage interest and property taxes from their federal income tax return. However, if you don't pay state income tax, you may not have enough deductions to exceed the standard deduction, which means you wouldn't be able to claim these deductions.
Also, some states that don't charge income tax may have lower property tax rates (New Hampshire is an example). This could reduce the property tax you can deduct on your federal income tax return. This is because the federal government only allows you to deduct up to $10,000 in state and local taxes (SALT) each year, including property tax.
The bottom line
Living in a state without income tax can have both advantages and disadvantages. On the one hand, you may enjoy a higher take-home pay, which can lead to greater financial stability. Additionally, states without income tax may be more attractive to retirees.
But there are drawbacks to tax-friendly earned income, which outweigh the pros. Some of the cons of living in a state with no income tax are higher sales or property taxes, reduced government services, and limited tax deductions. These drawbacks can significantly impact your quality of life and your ability to save money.
Ultimately, the decision to live in a state without income tax should be based on carefully considering the potential benefits and drawbacks and your financial situation and priorities. It's important to weigh the financial benefits against the potential trade-offs and to consider all factors.
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Writer
Jasir Jawaid is Joy Wallet's Assistant Editor. He has more than 13 years of experience as a journalist covering Wall Street, equities, financial policy and regulation, and cryptocurrency and blockchain.
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