U.S. States With No State Income Tax

Is it Really Cheaper to Live There?

Woman struggling to do her income tax return
Tax Day In America. Ida Hollis / Getty Image

While individuals and businesses in all 50 states pay federal income tax, residents in 41 states also pay state income tax. Seven states have no state income tax at all: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.

In addition, the states of New Hampshire and Tennessee tax only the interest and dividend income of their residents gained from financial investments. 

State income tax is typically based on the taxable income or adjusted gross income reported on the taxpayer's annual federal income tax return.

Not Always Cheaper to Live There

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 and they do so through various taxes including income taxes, sales taxes, property taxes, license taxes, fuel taxes, and estate and inheritance taxes, just to name a few. In states without state income tax, higher sales, property and other assorted taxes can exceed the annual cost of a state income tax.

For example, all states except Alaska, Delaware, Montana, New Hampshire and Oregon currently charge sales tax. Food, clothing, and prescription drugs are exempt from sales tax in most states.

In addition to states; cities, counties, school districts, and other jurisdictions impose real estate and sales taxes. For cities that do not sell their own utilities, like electricity and water, these taxes represent their main source of revenue.

Still, it is worth noting that during 2006 and 2007, the seven states with no income tax whatsoever, Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming, led the nation in net population growth.

However, 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.

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 9.45%, according to the independent and bipartisan Tax Foundation. That’s more than twice the combined sales tax rate in tourist-laden Hawaii.

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 37.5 cents per gallon, is the fifth-highest in the country.

Non-income states of Texas and Nevada also have higher-than-average sales taxes, and according to the Tax Foundation, Texas also has higher-than-average effective property tax rates.

 

And So, Higher Costs of Living for Some

Those extra taxes help to result in higher-than-average costs of living in some of the non-income tax states. Data from the independent Center for Regional Economic Competitiveness, Florida, South Dakota, Washington and New Hampshire all have higher than the median costs of living than in most states with an income tax.

So 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.