While everyone in the US pays a federal income tax, not everyone pays a state income tax. There are seven states in the US with no income tax whatsoever, plus two more that don’t tax wages.
While people who live in these states don’t pay income tax, they may pay higher taxes in other ways, like when they go shopping or stop at the gas station. This guide will explore whether or not people in income tax-free states save money overall, along with the pros and cons of moving to one of these states.
First, let’s look at the nine states with few or no taxes on income.
What Are the States With No Income Tax?
There are seven states with no income taxes whatsoever. They are the following:
- South Dakota
Two other states, New Hampshire and Tennessee, don’t have an income tax on wages, but they do tax interest and dividend income. If you’re making money from investments, for instance, then that profit would be taxed in New Hampshire or Tennessee.
The remaining 41 states do level a tax on income. Some have a flat-rate income tax, while others have different brackets based on how much money you make. These states gain revenue from income taxes, and that money goes into various services and programs.
In states that don’t collect income tax, where does the revenue come from?
Where Do States With No Income Tax Get Revenue?
States still need revenue, and they get that money from a variety of sources. Commonly, states without income tax have higher sales, gas, and property taxes. They may also provide fewer, more expensive, or lower quality public services. For instance, in-state tuition at the public universities in New Hampshire is higher than that of most other states.
Let’s look on a state-by-state basis to see how these no-income-tax states collect revenue.
- Alaska: petroleum revenue. Because of its oil, Alaska is an exception among income tax-free states. Rather than raising other taxes, Alaska actually distributes a dividend check to residents. Last year, each resident’s share was $2,075.
- Florida: above average sales taxes and property taxes.
- Nevada: gambling-related fees and taxes, as well as sales taxes.
- South Dakota: personal taxes, property taxes, cigarette excises, bank franchises, and ore taxes.
- Texas: oil and gas royalties, as well as a high sales tax.
- Washington: some of the highest sales and gasoline taxes in the United States.
- Wyoming: coal mining and property taxes. Like Alaska, Wyoming also gets revenue from its natural resources.
- New Hampshire: property tax.
- Tennessee: highest sales tax in the US.
Given these alternative forms of revenue collection, does living in a state without income tax mean you keep more of your paycheck?
Does Living in an Income Tax-Free State Mean You Keep More of Your Money?
The short answer to this question is, not necessarily. As you can see above, many states without income tax charge higher taxes on day-to-day expenses. They may also provide fewer public services or more expensive higher education. Depending on your spending habits and lifestyle, the amount of money you’re paying toward other taxes could be higher than the amount you would pay toward taxes overall in a state that had an income tax.
How much you benefit from an income tax-free policy also largely depends on your income level. Typically, people with a higher income benefit from the lack of income tax, while people with lower incomes end up paying a larger percentage of their salary to other kinds of taxes. According to the Institute on Taxation and Economic Policy in Washington, for example, the poorest 20% of state residents pay 16.9% of their annual income in sales and gas taxes, while the wealthiest 1% pay just 2.4% of their income.
Your income level, therefore, becomes an important factor if you’re deciding whether or not to move to a state with no income tax. What else should you consider as you figure out where to live in the United States?
Who Should Move to an Income Tax-Free State?
As you read above, income tax-free states tend to have higher sales, gas, and property taxes and a reduced budget for public programs, like education. If any of the following are true for you, then you might benefit from living in one of these states. If the opposite is true, then you probably shouldn’t move to one.
You Have a High Income
Higher-income people tend to benefit the most from living in an income tax-free state. Besides keeping a larger proportion of your wages, higher income people may also have less need for public services. For instance, higher-income people may not rely on public education, instead sending their kids to private schools.
You Don’t Own Much Property
If you don’t own a lot of property, then you won’t get hit too hard with the often high property taxes in income tax-free states. If you do own a lot of property, then living in one of the nine states discussed above probably wouldn’t work in your favor.
You Don’t Spend a Lot
Besides having higher property taxes, most of these nine states impose high sales taxes. If you have a high consumption lifestyle, then you’ll be putting a higher than average percentage of your income toward sales taxes. If you don’t spend a lot, then you may save money in one of these states overall.
You Don’t Rely on Public Services
States without income taxes may offer reduced or lower quality public services, like transportation, health care, or public education. If you don’t have kids or are sending your kids to private school, then this might not affect you.
Washington, by the way, is an exception with its strong public school system, but it has some of the highest sales and gas taxes in the country. If you drive a lot in Washington, then you might end up paying a lot in gas tax and highway and bridge tolls.
You Hold Conservative or Libertarian Views
People have different opinions about state income tax, and their support of or opposition to it tends to coincide with their social and political views.
People with progressive or liberal views tend to support government funding of public services, like education, health insurance, and transportation, and they tend to be in favor of income taxes, as well. Those with more conservative or libertarian views want to minimize the government’s role in shaping society and consequently, tend to be opposed to income taxes.
They may oppose any kind of income redistribution and prefer that all people pay the same on other taxes, like sales taxes. Progressives, however, point out that sales taxes affect people at different incomes disproportionately, with lower income populations becoming the most burdened.
People also disagree about whether income taxes help or hinder job and population growth. Those who oppose income tax say that doing away with it boosts jobs and helps the state retain young people. According to a 2013 study, though, Texas was the only non-income tax state where job growth didn’t lag behind population growth.
If you find yourself agreeing with the typically conservative or libertarian point of view opposed to state income tax, then you may well enjoy living one of the nine states listed above.
You’ve Done Your Research
Beyond figuring out whether living in an income tax free state would be financially beneficial for you, you should also base your decision on a number of other factors, like the state’s culture and weather and what your moving process would be like.
Are you ready to move to Nevada’s desert climate and live close to the temptation of gambling? Does the libertarian bent of many Texans appeal to you? Are you comfortable living in a remote place like Alaska where the sun shines all summer and hides all winter?
Any move calls for a good deal of research and planning. If your main motivation is doing away with income tax, then remember that there are other factors to consider, like state services and how the government’s alternative methods of revenue collection affect you as an individual or family.
If you do decide to pack up and move to the desert of Nevada or a ranch out in the Lone Star state, what steps do you need to take?
How to Move to a State With No Income Tax
In order to move and start enjoying an income tax-free life, you’ll typically need to establish both state residency and domicile. Residency and domicile laws vary by state. Typically, you’ll need to spend a certain amount of time in the state, as well as change some records to reflect your new address.
One common law states that you can’t spend more than 183 days in any single state beside your new state of residency. That’s not to say you have to spend the remaining 182 days in your new state of residency.
For instance, let’s say you’re moving to Texas. You spend 100 days in Texas, 100 days in Massachusetts, and 165 days in California. Since you didn’t spend a collective 183 days in a single state other than Texas, you can still call Texas your state of residency. However, if you had spent 100 days in Texas and the remaining 265 days in California, then you can’t call Texas your state of residency. Again, your time in one other state can’t exceed 183 days.
While establishing residency is pretty straightforward, establishing domicile is a bit more vague. Generally, domicile means that your community connections need to be stronger in your new state than your old state. These connections include things like your voter registration, driver’s license, and bank accounts. You also have to indicate that the new state will be your permanent home.
Since residency and domicile requirements vary by state, you’ll have to check the exact specifications for Texas, Wyoming, and the rest of the states with no income taxes. Besides rooting out the exact residency laws, make sure to remember these key points about states with no income taxes and how to move to one.
States With No Income Tax: Final Thoughts
While eliminating an income tax might sound like it saves you money, the policy is a little trickier than it sounds. States still need money, so getting rid of an income tax typically means that they impose higher taxes in other areas. The only exception is states that generate revenue from natural resources, like Alaska with its petroleum.
Whether living in a state with no income tax will save you money varies by individual. Typically, people who have a high income will benefit, as well as those who don’t rely on public education, drive very much, own a lot of property, or spend much money overall. You’ll have to take a look at your income, lifestyle, and spending habits to determine whether moving would be financially beneficial for you.
Because of the U.S.’s unique mix of state and federal laws, you should always look into tax laws when you’re considering moving. If you’re envisioning relocating to another part of the country, then consider the new state’s tax laws and how they’ll affect your personal finances.