Is Living in a State with No Income Tax Really Easier on Your Wallet?
All Americans are obligated to pay federal tax income taxes, and most states (and some counties and cities) will also make their residents pay a separate income tax with a few exceptions. The following states don’t have an income tax:
- South Dakota
Sometimes, people include New Hampshire and Tennessee on that list because earned income (wages and income from self-employment) isn’t taxed but those states do tax investment income like interest and dividends. The above seven states have zero state income tax.
There are some tradeoffs that can come with having no tax on your wages and other income. Tennessee doesn’t tax wages but has the highest sales tax rates in the nation, at a 7% base rate with local rates making total average 9.45% which is even higher than New York City’s 8.875% sales tax. Texas and Nevada also have very high sales tax rates, which heavily compounds cost of living regardless of how much you earn.
States with High Property Taxes
While states with high income taxes like New York and New Jersey are also home to high property taxes, Florida gathers most of its revenue from sales tax but also has very high property taxes as does Texas. New Hampshire homeowners pay among the highest property taxes in the nation and have the highest in-state tuition at public colleges of any other state. Like sales tax, mounting effective property taxes can make basic living expenses tougher to shoulder and harder to stay in your home if your income falls because of illness, job loss, or the birth of a child.
States that rely predominantly on regressive taxes like sales tax (where the tax takes up more of the taxpayer’s income as their income decreases) may also be more devious in other non-tax government fees such as traffic tickets, driver license fees, business licenses, and other public services and necessities. This is a form of taxation that doesn’t seem as blatant as having to file a state income tax return alongside your federal one every spring, but it is how state and local governments make up for the shortfall.
High Natural Resources can Offset State Taxes
Contrary to the states that rely on sales tax, Alaska and Wyoming receive massive tax revenue from their natural resources that enables them to have lower costs of living than other states. Alaska is a notable exception in that being so remote and having to rely on imports makes basic expenses like food more expensive, but the state also grants a basic income to its residents through the Alaska Permanent Fund so all the residents can share in the natural resource royalties the state receives as its primary revenue source.
When pondering whether to move to a different state, tax policy alone usually isn’t the deciding factor.
Moving for a job, the ease of setting up a business, or to be near loved ones may trump the economic reasons for moving to a low or no tax state. If you’ve lived in a high-tax state in your prime working years and having more money in your pocket sounds appealing, you should take a look at the state’s general approach to public policy and see if it aligns with your budget and values. You might not care about high traffic ticket prices if you don’t drive and high costs of getting a business license if you don’t want to start a business, but no income tax could still mean some hidden financial pitfalls elsewhere.
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