Humanities › Issues U.S. States With No State Income Tax Share Flipboard Email Print Getty Images Issues The U. S. Government Income Tax & The IRS History & Major Milestones U.S. Constitution & Bill of Rights U.S. Legal System U.S. Political System Defense & Security Consumer Awareness Campaigns & Elections Business & Finance U.S. Foreign Policy U.S. Liberal Politics U.S. Conservative Politics Women's Issues Civil Liberties The Middle East Terrorism Race Relations Immigration Crime & Punishment Animal Rights Canadian Government View More By Robert Longley History and Government Expert B.S., Texas A&M University Robert Longley is a U.S. government and history expert with over 30 years of experience in municipal government and urban planning. our editorial process Facebook Facebook Robert Longley Updated July 17, 2020 Individuals and businesses in all 50 states pay federal income tax, and residents in 41 states pay state income tax as well. Seven states have no state income tax at all: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. In addition, New Hampshire and Tennessee tax only the interest and dividend income that their residents earn from financial investments. Of particular interest to retired persons or those nearing retirement is that there is no additional state income tax on Social Security benefits, withdrawals from IRAs and 401(k)s, or payouts from pensions in these nine states. State income tax is typically based on the taxable income or adjusted gross income reported on a taxpayer's annual federal income tax return. State Taxes Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming do not tax the incomes of their residents.New Hampshire and Tennessee tax only income from interest, dividends, and financial investments.Due to the needs of these nine states to provide services and maintain infrastructure, other non-income taxes such as sales taxes, property taxes, and fuel taxes are often higher than in states with income tax. The Cost of Living in States Without Income Tax Is Not Always Lower The fact that a state does not have an income tax does not necessarily mean that its residents pay less in taxes than residents of states with an income tax. All states must generate revenue somehow and do so through various charges such as income, sales, property, license, fuel, estate, and inheritance taxes. All states except Alaska, Delaware, Montana, New Hampshire, and Oregon currently charge sales tax. Essentials like food, clothing, and prescription drugs are exempt from sales tax in most states. In addition, cities, counties, school districts, and other jurisdictions impose their own real estate and sales taxes. For cities that do not sell their own utilities like electricity and water, these comprise their main source of revenue. There are advantages to living in a state with no income tax, but this factor is not usually significant. The nonpartisan Center on Budget and Policy Priorities has reported that a state's income taxes have little influence over whether people ultimately decide to live there. Still, it is worth noting that during 2006 and 2007, the seven states with no income tax whatsoever led the nation in net population growth. Higher Costs of Living for Some States In states without a state income tax, sales, property, and other assorted taxes can be expected to be higher. In some states, these exceed the average annual cost of a state income tax, resulting in an overall higher cost of living. Data from the Missouri Economic Research and Information Center shows that the cost of living is higher than the median in Florida, South Dakota, Nevada, Washington, and Alaska, ("Cost of Living Data Series"). The bottom line is that there is just not enough concrete evidence to say whether or not it is really cheaper to live in a state with no income tax. How Do These States Get by Without Income Tax? Without revenue from income tax, how do these states pay for the basic functions of government? Simple: their citizens eat, wear clothes, smoke, drink alcohol, and pump gasoline into their cars. All of these and more goods are taxed by most states. Even states with income tax tend to tax goods and services in order to reduce their income tax rates. In states without an income tax, sales taxes and other fees such as vehicle registration fees tend to be higher than in states with income tax. For example, Tennessee—where only investment income is taxed—has the highest sales tax in America. When combined with local sales taxes, Tennessee’s 7% state sales tax results in a combined effective sales tax rate of 9.55%, according to the independent and bipartisan Tax Foundation, (Cammenga 2020). That’s more than twice the combined sales tax rate in tourist-laden Hawaii, 4.44%. In Washington, gasoline prices are usually among the highest in the nation, largely due to its gasoline tax. According to the U.S. Energy Information Administration, Washington’s gas tax, at 49.5 cents per gallon, is the fourth-highest in the country ("Fuel Tax Analysis State and Federal Motor Fuel Taxes"). The non-income states of Texas and Nevada have higher-than-average sales taxes, and Texas also has higher-than-average effective property tax rates. Sources Cammenga, Janelle. "State and Local Sales Tax Rates, Midyear 2020." Tax Foundation, 8 July 2020. "Cost of Living Data Series." Missouri Economic Research and Information Center, 2020."Fuel Tax Analysis 2020 State and Federal Motor Fuel Taxes." Washington State Department of Transportation, Jan. 2020.