What are the states with no income tax?
October 11, 2022 5 min read
States with no income tax seem to offer the opportunity to keep more of your hard-earned money. But it may not be that simple. Without the revenue from income taxes, states may end up making up the difference through other taxes or assessments.
Here’s a closer look at which states don’t have an income tax and how these states generate revenues in other ways.
- States rely on taxes and federal money to fund their budgets.
- Taxes, such as sales tax and property tax, might be higher in states that don’t collect income tax.
- The overall tax burden, a measure of how much a person’s income goes toward taxes, in these states can vary widely.
- The tax burden in some states without an income tax is higher than in some states with income taxes.
What are the income tax-free states?
Right now, the nine states that don’t collect personal income taxes are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.
Alaska doesn’t have a state sales tax or income tax. Instead, it relies on property taxes for roughly 50% of its state and local tax revenue, according to a 2020 report by taxfoundation.org. It’s also the state with the sixth-highest cost of living, according to a 2022 report by the Missouri Economic Research and Information Center (MERIC), in part because of the high cost of goods and services, such as groceries and utilities.
Florida relies on property taxes and state taxes for much of its revenue, but the rates of those taxes is about average compared to the rest of the country. Despite being a popular retirement haven, Florida’s cost of living is slightly above average, with groceries, housing and utilities representing the highest costs of living.
Nevada has a state and local sales tax of 8.23%, the 13th-highest in the nation. High housing costs also contribute to its higher-than-average cost of living index, according to MERIC.
Property taxes account for roughly 64% of New Hampshire’s state and local tax revenue, which makes sense considering it has the third-highest property tax rate in the country. Its cost-of-living index is also high, making it the 15th most expensive state to live in.
Like most of the other no-income-tax states, South Dakota relies heavily on property taxes and sales tax as its sources of revenue. However, it also gets 23% of its revenue from other categories, such as vehicle license fees, business licensing and estate taxes. Despite that, it has relatively low housing, transportation and utilities costs.
Tennessee’s state and local sales taxes are the second-highest in the country at 9.55%. Its cost-of-living index, however, makes it the 10th most affordable state—thanks, in part, to low housing costs.
Texas relies on high property taxes to make up for what it loses in income tax, ranking it the sixth-highest state for property taxes. Overall, it’s a relatively affordable state to live in, thanks to low housing and grocery costs.
Sales tax helps make up for the lack of personal income tax in Washington, as the state has the fourth-highest sales tax rate in the country. That fact, combined with high housing costs, make it the 12th most expensive place to live, according to MERIC data.
Wyoming boasts far lower than average tax rates for both sales and property taxes, despite relying on them heavily as sources of revenue. Its overall cost of living index is also lower than average, thanks to low housing costs. Like South Dakota, Wyoming relies more heavily on special taxes than many other states do.
What do states do with tax revenue?
State governments are largely responsible for funding health care and education. On average, these account for 17% and 41% of state budgets, respectively.
But according to the Center on Budget and Policy Priorities, “states also fund a wide variety of other services, including transportation, corrections, pension and health benefits for public employees, care for persons with mental illness and developmental disabilities, assistance to low-income families, economic development, environmental projects, state police, parks and recreation, housing and aid to local governments.”
To pay for all this, states primarily rely on tax revenue—including income taxes—and federal funds.
Is it cheaper to live in states with no income tax?
Regardless of whether there’s an income tax where you live, states still need resources to pay for things. If your state doesn’t collect income taxes, you might pay more in sales tax, property tax or vehicle registration. The cost of living can also be a consideration.
Florida, for example, doesn’t have an income tax. But its other state and local taxes rank 27th highest in the nation.
Alaska also has low taxes, but its remote location makes it an expensive place to live.
Education in states with no income tax
South Dakota and Wyoming—two states that don’t have an income tax—spent the least of all states on education, according to a 2021 Census Bureau analysis.
The lack of income tax revenue also impacts higher education. New Hampshire has some of the highest costs for in-state university tuition and provides the least funding for public colleges and universities.
States without income tax in a nutshell
If you’re considering moving to a state with no income tax, remember that income taxes are just part of the picture. In the absence of income taxes, state and local sales tax rates, the overall cost of living and other fees could still drive up the cost of living.
Planning a move? Learn about how to budget for your housing expenses.