I’m a Tax Expert: 7 High Taxes and Fees You’ll Pay in States With No Income Tax
Written by
Andrew Lisa
Edited by
Gary Dudak
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
Americans thinking of relocating have 50 states to choose from, and if some of them don’t levy income taxes, why on earth would anyone move to one that does?
Well, because revenue has to come from somewhere, and if your state doesn’t tax your earnings, it will have to squeeze you elsewhere to make up the difference.
“I’m often asked about the pros and cons of living in states with no income tax,” said Benson Varghese, founder and managing partner of Varghese Summersett, a law firm in Texas where he advises clients on financial and tax matters. “While avoiding state income tax can provide significant savings, these states still need revenue streams. They tend to make up the difference through higher sales, property and other taxes.”
Property Taxes
If you own a home, you pay property taxes directly. If you don’t, they’re baked into the cost of your rent. Either way, they tend to be higher in states that leave your earnings untouched.
“For example, property taxes in states like Texas and Florida are notably higher than average,” said Varghese. “The annual property tax on a $250,000 home in Texas would be around $3,000 compared to $2,000 in a state like North Carolina. Higher home values get hit even harder.”
Sales Tax
Zero-income-tax states also make up for lost revenue with the tax that follows you everywhere you go and affects everything you buy, from a yacht to a stick of gum.
“Sales tax rates also tend to be elevated in income-tax-free states,” said Varghese. “The average combined state and local sales tax is 8.75% in Florida versus 6% in New York. That extra 2.75% adds up quickly, especially on big purchases like cars.”
‘Sin’ Taxes
If you’re one of the millions of Americans who don’t always live a clean life, you can expect to pay more for the things that might make you feel good, even if they aren’t good for you.
“Sin taxes on things like cigarettes, alcohol and gambling also tend to be higher as states tap into vice to boost revenue,” said Varghese. “Texas has one of the highest taxes per pack of cigarettes at $1.41 versus $0.49 in California.”
Inheritance Taxes
If you move to a state to avoid income taxes, not just you, but your posterity could get stuck with the bill.
“Even inheritance tax rates can be greater with the lack of an income tax offset,” said Varghese. “Moving to avoid income tax may just shift the tax burden onto property, consumption and estates. It’s important to crunch the full numbers to see if it’s worthwhile for your situation. There may be breaks elsewhere that balance out.”
Miscellaneous Taxes
States also leverage more obscure taxes that you might not notice as much as obvious things like sales taxes, but that add to the tally just the same.
“In addition to the more common taxes on property, sales and vices, some states get creative with more obscure levies,” said Varghese. “For example, Texas has extensive taxes and fees related to oil and gas extraction that contribute billions annually. There are also taxes on utilities, hotel occupancy, insurance premiums, and dividends and investments that help pick up the slack.”
Environmental Taxes
If your state doesn’t tax your income, it might tax your carbon footprint to make up the difference.
“Some states charge environmental fees on things like plastic bags, tires and car batteries to fund conservation efforts,” said Varghese. “Specific industries like agriculture, mining, and renewable energy may face specialized taxes.”
Licenses, Registrations and Fees
Other sources of lost revenue include the myriad of activities where you have to pay to play and the fines associated with rules and regulations.
“Even hunting and fishing licenses, vehicle registration fees, traffic fines, and other nickel-and-diming costs tend to be higher in states not collecting income tax,” said Varghese. “Toll roads and privatized highways are more common, too.”
In summation, there’s no such thing as a free lunch. Every state has to pay the bills, and if they don’t tax your income, they’ll get their tribute from other sources.
“While avoiding income tax may seem attractive, you still end up paying in less obvious ways,” said Varghese. “The costs just get split up and shifted onto various goods, services and activities. It’s not necessarily cheaper overall, so watch out for the hidden taxes if moving to a zero-income tax state. The grass may seem greener, but there are always tradeoffs.”
More From GOBankingRates
