States without Income Tax

partial map of the United States

The deadline for the federal income tax may have already been pushed back until May 17, but some taxpayers might be luckier than others. In nine U.S. states, individuals do not have to file a state tax return, as they (the states) don’t oblige taxpayers to pay tax on personal income. This means that each taxpaying resident of these states sees less money coming out of their monthly paycheck. Also, when the tax season comes, they are only called to submit a federal return. 

 

The 9 States With No Income Tax 

In the following states, residents do not pay tax on their earnings. You will notice that we have added New Hampshire to the list, although it taxes investment earnings. This is because New Hampshire does not charge any tax on earned wages. Something similar applies to Tennessee, which has no state income tax on earned income AND no longer taxes investment earnings as of this year

  1. Texas – The Texas constitution has forbidden personal income tax, but the state does have higher sales and property taxes than other states to make up the difference. 
  2. Washington – Washington is probably the only state that has never levied personal income tax on its residents. It does, however, have a particularly high average sales tax rate (around 9%) while businesses have to pay occupation and business tax. They are not subject to income tax, though. The fuel costs here are also quite higher than in other states. 
  3. Alaska – The businesses and individuals in Alaska have been free of state income tax for many decades. However, the state is also sales-tax-free and makes up these funds through other types of taxes, such as from estate, gift, and severance. In addition, Alaska distributes extra funds to its citizens annually via the Alaska Permanent Fund Corporation.
  4. Nevada – Nevada earns a huge income every year from gambling taxes and fees and, of course, tourism. Perhaps, that’s why it does not charge personal income tax. On the flip side, it makes up the deficit with a higher sales tax that climbs to 8% in some jurisdictions.  
  5. Florida – Florida has stopped charging state income tax since 1855. Nevertheless, its property taxes are higher than in the majority of other U.S states. Also, its businesses are obliged to pay corporate income tax while its individuals are subject to sales tax. 
  6. Wyoming – Living in Wyoming saves you from both personal income and retirement income taxes. Income tax is also not imposed on corporations. The state makes money by taxing businesses producing natural resources (i.e., coal) and property taxes. 
  7. South Dakota – South Dakota is considered a haven for retirees and has not been having state income since 1943. It is one of the most tax-friendly states in the country that makes up the difference with things like laundromat license fees and taxes on cigarettes and alcohol. South Dakota funds country and city improvement projects via personal and local property taxes. It also has one of the lowest sales tax rates nationwide and close-to-the-national-average property tax rates. 
  8. New Hampshire – The state of New Hampshire does not have personal income tax except for a 5% tax imposed on investment income of more than $2,400 per person. New Hampshire is, however, high in excise and alcohol taxes and is among the top states with the highest property taxes. College costs are also relatively high here. 
  9. Tennessee – Residents of Tennessee are not called to pay taxes on personal wages. To make up the difference, the state has high sales, beer, and excise taxes. 

As for the remaining states in the United States, 32 states (plus Washington, D.C.) charge a progressive income tax where lower earners pay a lower percentage of their income than higher earners do. Another nine (9) states have a flat income tax that taxes all taxpayers at the same rate irrespective of how much they earn. 

It should be noted that according to a United Van Lines National Migration study conducted in 2020, the Coronavirus situation seems to have accelerated decisions to move from states like New Jersey (known for charging a high income tax) to no-income tax states like Florida and South Dakota. 

However, is relocating to a tax-friendlier state a wise move? Are there any significant trade-offs that should be taken into account? Here are some factors to bear in mind before taking the step.

 

The Migration to No-Income-Tax States

A report published by the American Legislative Exchange Council demonstrates that in the past 10 years or so, the nine states that impose no personal income tax have outperformed their counterparts with the highest taxes on personal income, on in-state migration, employment growth, and GDP growth. 

Similarly, the same nine states witnessed a population growth that was 109% faster than in other states with high income tax. Simultaneously, there were many more available jobs in the nine states than the other ones (130% faster job growth). There was even a 51% rise in local and state tax revenues in the same nine states. 

Aside from that, living in a state that charges no income tax is a significant advantage for high-income households. Instead of being forced to pay high taxes, which is the case in many states, the states with zero personal income tax do not tax these individuals’ earnings at all. This, in turn, enables them (the taxpayers) to save more of their money, which is a major reason why wealthy people choose to relocate or live in a state without a state income tax. 

However, all income classes are benefited from not having to pay state income taxes since they can pocket more of their hard-earned dollars during tax season and save for school tuition, retirement, and more. It is also worth noting that having no income tax is also an appealing and effective way to redistribute wealth, with low-income households reaping the most benefits from it. 

Another point of consideration is the new tax laws that limit the itemized deductions for local and state taxes (the cap is $10.000). This falls heavily on the people living in states with high personal income rates, such as California and New York, who can no longer deduct the full sum of their sales and property taxes (if they were not taking the $12,700 standard deduction for married couples filing jointly or the $6,350 deduction for individuals). Clearly, a low-tax environment comes with major advantages in this respect. 

 

The Other Side of the Coin

States with no income tax need to find other alternatives to make up for the state’s revenue loss from charging no income tax. In their attempt, they usually end up imposing higher excise, property, or sales taxes. So, people living in these states may be called to pay more tax for things like alcohol, tobacco, fuel, clothes, groceries, and other goods. This is the case in Nevada. 

According to a Washington-based think tank, the Tax Foundation, Tennessee was nearly on top of the list of the states with the highest sales tax rate across the country (9.53%). Another report dealing with state gas tax rates has evidenced that Washington’s gasoline tax rate is among the highest in the USA as of 2019 (49.5 cents/gallon). The Energy Information Administration reports that this is the 3rd highest gas tax in the country, behind California and Pennsylvania. 

Besides, Alaska, Texas, Florida, and New Hampshire appear to be the most reliant of all states on property taxes (accounting for 51.8% and 67.6% of their revenue, respectively). What is more, the sales taxes in Nevada and Texas are above average, while Alaska and Wyoming have hefty taxes on oil drilling and coal mining operations. So, they use their natural resources to make up for the lost income tax revenue. 

Let’s also not forget that the public services in every state (i.e., education, healthcare, law enforcement agencies, and infrastructure) are primarily financed by taxes (property, income, and sales taxes). So, the less taxes they receive from their taxpayers, the lower funding these initiatives have. In fact, the United States Census Bureau has shown that the state which spends the least on education in the Midwest is South Dakota. When the national average school spending per pupil is $12,612, South Dakota spends $10,073. Other states like Texas, Tennessee, Nevada, and Florida also spend below the national average. 

When it comes to the living expenses in the nine states with no income tax, they tend to be higher than the national average in some of these states, including Alaska, Washington, Florida, South Dakota, Nevada, and New Hampshire. They were all among the 24 U.S. states with the highest living cost in 2020

 

Balancing the Pros and Cons

It becomes apparent that the final choice is yours, and it is only a matter of perspective and what trade-offs you are willing to compromise with. You may, for example, have to come to terms with a lower-paying job for more affordable real estate. The final decision also depends on your income level, filing status, and the kind of life you see for yourself and your loved ones in the future. 

If you are ready to start a new life in another state, like one of the nine offering no income tax, feel free to contact us for effective debt relief solutions to help solve your federal or state income tax debt. That way, you can start fresh again and get rid of the hurdles that affect your financial bottom line. 

 

Ozzie Gomez is a Senior Tax Settlement Agent and the owner of Innovative Tax Relief which holds business licenses in Tax Resolution, Tax Audit Representation and Tax Preparation.  With almost 10 years of experience in the tax resolution industry, he has personally helped more than 4,000 individuals and businesses resolve their tax issues.

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