Pros and Cons of Living in a State With No Income Tax
Every U.S. citizen is responsible for paying federal income tax, and some taxpayers also must pay a separate state income tax. As of 2022, just nine states don’t impose any additional income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.
At first glance, it might seem as if there’s no reason to live in a state with income tax, as it simply adds an additional financial burden to your budget. But there are both pros and cons to living in a state that has no income tax.
Pro: You’ll Have To Pay Only Federal Income Tax
The top federal income tax bracket for 2022 is 37%. If you find yourself in that bracket, you’ll already be forking over a significant amount of your income to the federal government. Adding state income tax on top of that, especially in a high-tax state like California, can push your total income tax bill to over 50%. Rates like that are enough to push some high earners away from high-tax states like California to no-tax states like Texas.
Con: Other Taxes Might Be Higher
States that have no income tax aren’t excessively wealthy and benevolent. They simply have a different structure for raising revenue. With no income tax dollars coming in, these states must get that revenue from other sources.
Typically, this translates to higher sales taxes, property taxes and/or gasoline taxes. For example, homeowners in New Hampshire and Texas pay some of the highest property taxes in the country, at 1.89% and 1.6%. Washington charges the third-highest gasoline taxes in the country, at 49.4 cents per gallon.
While you might not have to pay state income tax, your overall tax bill actually might end up being higher, depending on your lifestyle. If you don’t own property and you use public transportation, for example, your tax bill likely will be significantly lower. But if you own some expensive real estate and drive a gas-guzzling car for your daily commute, your tax bill could be significant.
Con: Lower Infrastructure and Education Spending
In some cases, having no state income tax does translate to lower revenue for individual states. In turn, this may result in lower state spending on basic services. According to a 2021 analysis by the U.S. Census Bureau, South Dakota and Wyoming — two states with no income tax — spent the least amount on education of all 50 states.
Other states with no income tax revenue may lower spending in other areas, such as infrastructure. As a resident, you’ll have to decide whether that tradeoff is worth it.
Is It Better To Live in a State With No Income Tax?
At the end of the day, whether or not it’s better to live in a state with no income tax depends in part on your personal financial situation — but there are other considerations as well. For example, quality of life and the lifestyle you choose to live are also important.
From a strictly financial standpoint, it’s important to remember that the amount you earn plays a large role in your tax situation. If you’re a single taxpayer living in California and earning $1 million per year, for example, tax rates reach a whopping 13.3%. However, if you earn a low-to-moderate wage, tax rates are not that onerous, even in California. As with any financial question, there’s no black-and-white answer to whether it’s preferential to live in a state with no income tax, as a number of personal factors come into play.
More From GOBankingRates