States collect income tax to fund services such as education, healthcare, and infrastructure. Besides personal income tax, states also rely on sales and business taxes for revenue. Some states do not have a state income tax and instead rely more on other taxes like sales, property, and capital gains taxes. But is it advantageous to live in a state without income tax? Here is what you should consider.
States Without Income Tax
Dislike seeing a significant portion of your earnings go to state taxes? Moving to a state without income tax could potentially save you thousands of dollars. However, it’s essential to note that you might end up paying more in terms of sales and property taxes.
States without income tax include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. Here are some key details about a few of these states:
1. Alaska
Total tax burden: 4.93%
Income tax absence since: 1980
Main alternative tax sources: Revenue from oil and natural resources
Financial impact: Groceries and consumer items can be costly due to Alaska’s remote location
Known for its breathtaking landscapes and vast wilderness, Alaska does not have a state income tax or sales tax. However, some local municipalities may collect sales tax. It boasts the lowest tax burden in the U.S.
2. Florida
Total tax burden: 6.05%
Income tax absence since: 1855
Main alternative tax sources: 6% sales tax rate, revenue from tourism
Financial impact: Expensive real estate market due to warm weather and retirement appeal
Florida’s year-round warm weather, job opportunities, and lack of state income tax make it a popular choice for retirees and families. The state relies on tourism revenue and has a 6% sales tax rate.
3. Nevada
Total tax burden: 7.37%
Never had an income tax
Main alternative tax sources: 6.85% sales tax rate, tourism
Financial impact: One of the lowest property tax rates in the U.S.
Residents in Clark County, home to Las Vegas, face an 8.38% sales tax rate. Despite this, the state sustains itself without income tax due to tourism revenue.
4. New Hampshire
Total tax burden: 5.63%
Income tax absence since: January 2025
Main alternative tax sources: High property taxes
Financial impact: No sales tax for residents
New Hampshire ranks second in states with the lowest tax burden but has one of the highest property tax rates. Owner-occupied properties face an effective rate of 1.93%.
5. South Dakota
Total tax burden: 6.44%
Income tax absence since: 1943
Main alternative tax sources: General and select sales taxes
Financial impact: Tax-friendly state but limited high-income job opportunities
Known for its friendly communities and open spaces, South Dakota is tax-friendly but may present challenges in finding lucrative job opportunities.
If you reside in Tennessee, you benefit from a low sales and use tax rate of 4.2%. Moreover, municipalities have the authority to impose a local sales tax of up to 2% and a local municipal gross receipts tax of up to 1%. As of 2021, Tennessee has completely eliminated its state income tax, including the Hall tax on interest and dividend income. Instead, the state relies on a sales tax rate of 7%, with municipal and local sales taxes bringing the state-wide average to 9.55%. Residents of Tennessee enjoy relatively low tax burdens and affordable real estate prices outside of Nashville.
In Texas, there is no state income tax, but residents are subject to a 6.25% sales tax rate along with high property taxes. Despite this, the state offers lower-than-average home prices in many cities, making up for the high taxes to a certain extent.
Washington does not have a state income tax either, relying primarily on a high sales tax rate of 6.5% to generate revenue. While the state has relatively low property taxes, it is known for its expensive real estate and high cost of living.
Wyoming stands out for not having a personal or business income tax, making it a favorable state for businesses. With a reasonable sales tax rate of 4% and low property taxes, Wyoming is considered an affordable state to live in.
Living in states without income tax, such as Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming, has its advantages and disadvantages. On one hand, residents can keep more of their income, retirees benefit from no state tax on Social Security or retirement withdrawals, and high-income earners may be attracted to relocate for tax savings. On the other hand, living in a tax-free state may not be suitable for everyone, especially if they are accustomed to the services funded by income tax revenue.
When it comes to taxes, if you’re not paying income tax, you’re probably facing higher costs in other areas such as sales or property taxes. Living in a state without income tax may sound appealing, but it’s important to consider the trade-offs. Higher sales and property taxes are common in states without income tax, which can impact your overall cost of living. Additionally, reduced funding for public services like education and healthcare may be a drawback.
Deciding whether to relocate to a state without income tax requires careful consideration of your personal finances. Reflect on how much you currently pay in state income tax and compare potential savings to the increased costs in sales and property taxes. Research the property and sales tax rates in your desired state using a tax calculator. Evaluate whether the overall cost of living is lower, factoring in housing, utilities, and transportation expenses. Consider whether you are willing to sacrifice certain public services in exchange for tax benefits like lower education, infrastructure, and healthcare funding.
It’s worth noting that your income level significantly influences your tax circumstances. For instance, high earners in states like California may face steep tax rates, while those with lower to moderate incomes may not feel the burden as heavily.
Ultimately, the decision of whether it’s better to live in a state without income tax is not clear-cut and depends on individual circumstances. Conduct a thorough financial analysis to determine if residing in a state without income tax is the right choice for you.
