States collect income tax to pay for services such as education, medical care and public infrastructure. A large part of each state’s revenue comes from personal income tax as well as sales tax and business tax assessments. Some states, however, don’t impose a state income tax; instead, these states charge more in other taxes, such as sales and capital gains taxes.
You might consider a move to one of these no-income-tax states if you cringe at the income tax deduction from your paycheck each month. But keep in mind that you’ll likely be paying more in sales and property taxes. Here’s all the information you need on which states have no income tax.
States Without Income Tax
The following states don’t levy income tax on their residents — instead, they generate money in other ways to pay for state-provided services. You might have to pay a higher tax in other areas, but it could be cheaper than the amount of tax you pay now.
Here are seven states with no state income tax:
- South Dakota
See how these states make up for that lack of income tax — then decide if it’s worth a move.
Alaska doesn’t have a personal income tax or sales tax. The majority of its revenue comes from exporting oil via the Trans-Alaska Pipeline System.
When oil prices are high and stable, Alaska receives a surplus of revenue, which it invests in the Alaska Permanent Fund. The fund consists of a diversified portfolio and citizens share in its earnings each year by completing a proof of residency application. With oil prices slumping in recent years, however, there’s been talk of introducing a state income tax.
Warm weather all year round, growing job prospects and no state income tax make Florida a popular state. Although the state has no income tax, it does charge a higher-than-average sales tax rate of 6 percent.
Everything You Need to Know: Florida State Taxes
Nevada also makes up for not collecting state income by charging a higher-than-average sales tax rate of 6.85 percent, the 13th highest rate in the country. In addition, Nevada plans to raise the sales tax rate in 2017. Nevada’s sale tax rate is no bargain for locals, but because the state depends on tourism dollars, the rate keeps it solvent.
Everything You Need to Know: Nevada State Taxes
South Dakota is a sparsely populated state — it was ranked 46th in the country in 2017. If you live here, you don’t pay income tax and you pay a low sales tax rate of 4.5 percent. Job prospects aren’t great in South Dakota, however, and the minimum wage is a low $8.65, which increased by only a dime in 2017.
Texas residents pay no income tax, but do have to deal with a 6.4 percent sales tax rate and property taxes that are among the highest in the nation. In addition, Texas’s minimum wage is only $7.25 for 2017, so wages don’t provide much purchasing power even with the income tax break.
With no income tax to rely on, the state of Washington charges a higher sales tax to bring in revenue. At 6.5 percent, the state’s tax rate is among the highest in the nation in 2017. Washington does enjoy a minimum wage of $11 per hour, however, which is the third highest in the U.S.
Wyoming doesn’t have a personal income tax or a business income tax, which makes it a business-friendly state. In addition, sales tax is a reasonable 4 percent for 2017. A large energy producer, Wyoming collects oil production taxes to offset its lack of state income tax.
The Next State to Become Tax-Free
In 2016, Tennessee Gov. Bill Haslam signed a bill to decrease the Hall tax — which taxes state residents on interest and dividends — incrementally from 6 percent in 2016 by 1 percent each year until it is eliminated entirely in tax year 2022. That year, Tennessee will officially become the eighth state to have no income tax.
Pros and Cons of Tax-Free States
Living in a tax-free state might be attractive to many Americans residing in a state with high income taxes. Nothing is free, however — states still have to collect enough revenue to fund services and infrastructure.
If you aren’t paying income tax, you’re likely paying more in other areas like sales or property taxes. In addition, low wages and few job prospects might make living in a no-income-tax state unaffordable even with this generous tax break.
Up Next: Tax-Free Weekends Across the U.S.
Laira Martin contributed to the reporting for this article.