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.
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%.
Nevada also makes up for not collecting state income by charging a higher-than-average sales tax rate of 6.85%. With combined state and local taxes, residents of Clark County shell out 8.38% in sales tax. This rate is no bargain for locals, but because the state depends on tourism dollars, the tax keeps it solvent.
The state of New Hampshire charges a 5% tax on interest and dividend income. The state does not, however, charge income taxes on any resident’s W-2 wages.
South Dakota is a sparsely populated state. If you live here, you don’t pay income tax and you pay a low sales tax rate of 4.5%. Job prospects aren’t great in South Dakota, however, and the minimum wage is a low $10.80.
As of January 1st, 2021, Tennessee has completely repealed the state’s income tax — including the Hall tax, which charged a 1% tax on interest and dividend income. No taxes are collected on reported W-2 wages.
Texas residents pay no income tax, but do have to deal with a 6.25% sales tax rate and property taxes that are among the highest in the nation. In addition, Texas’s minimum wage is only $7.25, 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%, the state’s tax rate is among the highest in the nation. Washington does enjoy a minimum wage of $15.74 per hour.
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%. A large energy producer, Wyoming collects oil production taxes to offset its lack of state 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.
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Laira Martin contributed to the reporting for this article.