Did you know that there are nine U.S. states that don’t impose state income tax? Yep, it’s true! As for the other 41 states, they have either a flat income tax (i.e. everyone pays the same percentage of their income to the government regardless of how much they earn) or a progressive income tax (i.e. the tax rate you pay is determined by your income). Keep reading to learn which states don’t impose income taxes and the pros and cons of not having to file.
Alaska does not have a state income tax or sales tax. In fact, the total state and local tax burden on Alaskans are the lowest of all the 50 states, at just 5.1 percent of personal income. And, although it’s one of the most tax-friendly states, Alaska is actually an expensive place to live. Something else to note: Alaska allows some municipalities to levy sales taxes, which can go as high as 7.5 percent. Not only that but the median property tax rate is also $1,183 per $100,000 of assessed home value, just slightly above the national average.
FUN FACT: Alaska makes up its lost revenue with coal mining and oil drilling, which both bring in big tax revenues.
Because Florida has no state income tax, it relies heavily on sales taxes (six percent at the state level, with localities allowed to add as much as 2.5 percent) and property taxes (the median rate in 2019 was $928 for every $100,000 of assessed home value). In fact, sales and property taxes in Florida are above the national average. Florida also has a higher-than-average cost of living and housing costs. On the plus side, Florida has the third-lowest overall tax burden in the country at 6.56 percent.
Like Florida, Nevada also relies heavily on revenue from high sales taxes on things like groceries, clothing, alcohol, gambling, casinos, hotels, etc. In fact, the state sales tax is 6.85 percent and localities can add as much as 1.65 percent. Just in Las Vegas alone, there’s a combined state, county, and city sales tax of 8.25 percent. As a result of the state’s high sales taxes, Nevada has the worst overall state-imposed tax burden (8.26 percent) of all the states with no income tax. Also, Nevada has a high cost of living and housing.
6. South Dakota
South Dakota‘s sales tax is only 4.5 percent, among the lowest in the nation. To make up for that loss, municipalities can collect up to two percent on top of that 4.5 percent tax. The state’s Department of Revenue collects a variety of special taxes, such as excise taxes on alcohol and cigarettes, as well as bank franchise taxes. South Dakota also has higher-than-average property taxes, but its residents’ tax burden is just 7.28 percent. So, how does South Dakota keep its residents free of income tax? Its higher-than-average property taxes combined with the fact that South Dakota is home to several major credit card companies means it doesn’t have to impose a state income tax.
While Texas doesn’t impose an individual income tax or state-level property tax, it does allow local governments to collect property taxes. In fact, Texas has some of the highest property tax rates in the country. In 2017, county and municipal property tax levies throughout the state ranged up to two percent.
Another way the state brings in revenue is through sales and excise taxes. Texas levies a state sales tax of 6.25 percent, and local jurisdictions can levy up to two percent in additional taxes. This means that some jurisdictions have sales taxes as high as 8.25 percent!
FUN FACT: The state constitution forbids personal income taxes.
Although Washington doesn’t impose a corporate income tax, its residents pay high sales and excise taxes. In fact, it ranks ninth in the nation for the highest sales taxes. That’s because its 6.5 state sales tax along with city and/or municipal sales-tax rates can climb to more than 10 percent! And, unlike the other states mentioned in this article, Washington imposes a tax on estates exceeding $2.193 million, with rates ranging from 10 to 20 percent.
Something else to note: Gas prices are higher in Washington than in most other states.
Wyoming residents do not have to pay personal or corporate state income taxes and they also aren’t required to pay retirement income taxes! Property and sales tax rates in Wyoming are also low. The state sales tax rate is four percent, with municipalities allowed to add up to two percent on top of that. The median property tax rate is $609 per $100,000 of assessed home value, which just so happens to be the ninth-lowest in the country. So, how does the state bring in revenue? Well, like Alaska, Wyoming relies on taxes from natural resources, mainly coal and oil.
FUN FACT: Wyoming is the second least densely populated state, with about six people per square mile. As you probably guessed, Wyoming comes in second to Alaska, which has about one person per square mile.
2. New Hampshire
While New Hampshire doesn’t tax earned income, it does tax investment income in the form of interest and dividends at five percent and two percent, respectively, for the 2019 tax year. In other words, if you live in New Hampshire and receive income from investments, you will probably need to file a state return, although there are some exemptions available for elderly, blind, and disabled residents.
New Hampshire does levy excise taxes, including taxes on alcohol. It also has an average property tax rate of 2.20 percent, the third-highest in the country. Plus, its poor contributions to higher education have resulted in some of the most expensive two- and four-year colleges in the United States.
FUN FACT: New Hampshire’s Senate recently passed legislation to phase out the investment income tax over five years, with full implementation by 2025.
Tennessee is another state that doesn’t tax earned income but does tax investment income. Tennessee has the Hall Tax, which taxed dividends and some interest at two percent for 2019. The first $1,250 in taxable income for individuals ($2,500 for joint filers) is exempt. The rate will drop to one percent in 2020 and then be phased out entirely by 2021.
Here are some other things to keep in mind: Tennessee has one of the highest sales tax rates in the country at seven percent, and the highest beer tax of any state at $1.29 per gallon. Tennessee also has a high gasoline tax. Groceries are taxed at four percent by the state, plus whatever local rate is in effect. Note that local taxes are limited. Only the first $1,600 of an item is taxable.
So, there you have it. These are the nine states with no income tax. If you are a resident of one of the states mentioned here, drop us a comment below telling us what you feel are the pros and cons of not having to file a state tax return. Thanks for reading!