Paying taxes is close to the top of the least favorite things for people who work hard to earn a living. As of 2018, the average American pays over $10,000 in taxes on wages earned, including over $8,000 in federal income tax and over $2,000 in state and local income taxes. Tack onto those income tax obligations the commitment that hard-working Americans have to pay property tax and sales taxes, besides also having to fund Social Security and Medicare, and you’d be right to understand why we often look for a break from taxes.
Well, did you know that there are several states that don’t require residents to pay income taxes on their personal wages? Here is a list of those states, including some of the reasons they choose not to extract state income tax from those living within their respective state jurisdictions.
These nine states don’t have a state income tax on wages earned: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming
The map below shows the effective income tax rate of all 50 of the United States. You’ll notice that Tennessee and New Hampshire have effective income tax rates higher than 0%. That’s because those states both tax interest income and dividends, but they do not tax wages. Tennessee is in the process of phasing out its taxing of interest income and dividends, with that tax liability going away by 2022.
Before you just up and move to one of these states to get rid of your income tax obligation, there are other factors you’ll want to consider, including the overall cost of living and affordability of living in a state that doesn’t tax income. For instance, Texas has no income tax, but if you want to own land in Texas, you’ll be paying an effective rate of nearly 2% of your income. Texas is consistently one of the top 10 most expensive states in the country when it comes to property tax. If you want to own a lot of property or an expensive but don’t have a lot of taxable income, Texas may not be the place for you.
The map overlay below, provided by the Tax Foundation shows the comparative property tax rates and ranks for each state in the United States. If you’re interested in moving to one of the nine states listed above that doesn’t have a state income tax, also consider what the property tax rate is that you’ll be paying. If you’re planning to rent your housing or for some other reason won’t own property, you won’t be affected. However, if you’ll be buying land or your own home to live in, these rates have significant meaning for you.
Similarly, Tennessee doesn’t have a state income tax, but its average sales tax rate is the highest in the country. If you don’t have a large taxable income, but like to buy lots of things, Tennessee becomes much less affordable as sales tax expenses offset the benefits you receive for not having to pay a state income tax.
The image below, provided courtesy of the Tax Foundation, will help you understand how the states compare when it comes to sales tax. If you’re thinking of moving to one of the states that don’t have state income tax, also consider how their sales tax rates affect your livelihood and ability to thrive.
Income Taxes and Overall Affordability
When considering where to live based on how far your earning power will take you, it’s good to think about what tax expenses you might incur (including state income taxes) in light of the other factors affecting your ability to thrive financially and enjoy life. Similar to summary comparisons available for property taxes and sales tax rates throughout the 50 states, there is also data available that summarizes overall cost of living metrics. US News recently published a useful set of data they call “Affordability Rankings” of all the states. Their rankings weigh a combination of cost of living and housing affordability data. Cost of living data comes from surveys done by the Council for Community and Economic Research that evaluates price information submitted to them from participating metropolitan areas. The housing affordability rankings come from an analysis from Moody Analytics in coordination with the US Census Bureau.
If you’re considering moving to a state based upon whether there are state income taxes or not, it’s a good idea to make sure you’re considering other factors that will likely affect your financial prosperity.
Why Don’t These States Have an Income Tax on Personal Wages?
If you’re like me, you may wonder how it is that some states can get by and secure enough revenue to perform their inherent duties – building and maintaining roads and other elements of transportation, policing and defense, education and other public goods and services – without money coming from state income tax. I’ve explained other parts of the state (and local) revenue systems, which are used to offset losses from not collecting a state income tax. Here are some of the specific reasons these nine states don’t feel the need to collect an income tax.
Alaska: Not only does Alaska not have a state income tax, residents of Alaska are given a subsidy (money from the Permanent Fund Dividend) from the state. Alaska has vast natural resources, and collects taxes from oil and other natural resources that are obtained from the state.
Florida: Florida’s economy is healthy and its politics tend to be generally conservative. The tourism industry in Florida provides income (including through sales tax) to offset its losses from state income taxes.
Nevada: Much of Nevada’s state budget comes from sales taxes and from the gambling (think of all the money lost in Las Vegas) and, similar to Alaska although not nearly to the extent, from the mining industries in the state.
New Hampshire: New Hampshire taxes interest and dividends at 5% each. It also taxes business profits at 8.5%. New Hampshire doesn’t have a sales tax, but they instead rely heavily on property taxes. New Hampshire currently has the third highest effective property tax rate in the country.
Tennessee: Tennessee currently (through 2022) taxes interest and dividends (the “Hall Tax”) of individuals, but doesn’t tax their living wages from jobs. Tennessee has a very high effective sales tax rate from which it receives significant revenue for the state government.
Texas: Texas has very high property tax rates to supply its state government. Also, Texas has a higher than average sales tax rate.
Washington: Washington is one of the only states never to have had an income tax. Their state budget is buoyed by a high sales tax rate and an above average property tax rate.
Wyoming: Like Alaska and Nevada, Wyoming leans heavily on revenues on its natural resources, extraction of oil and mining of coal. Wyoming’s property taxes and sales taxes are below the national average.
South Dakota: It turns out that South Dakota is one of the most tax friendly states in the country. The exception is for those who drink alcohol or smoke cigarettes, two things which the state taxes heavily to bring in revenue.
In discussing how these states provide for themselves without the help of a state income tax, we haven’t covered the topic of fiscal responsibility. As anyone who has operated a budget knows, it’s not all about how much money you bring in. Half of the equation relates to your ability to use money wisely and avoid waste. State governments operate on the same principle. If there is lots of waste in the spending habits of a particular state government (California comes to mind, but there are also examples of waste that can be found among many states), the tax burden will be higher. That burden must be placed on some part of the state economy.
Another factor affecting state budgets and income is the principle that lowering taxes on individuals allows them to spend that money in ways that help to grow the economy, which ultimately contributes to more tax revenue. The effects of following this approach often do not directly affect the state itself (someone who saved on income taxes in Florida can spend that excess money in another state), but that approach can be seen in some of the 9 income-tax-free states listed above.
Is it Financially Beneficial for You to Live Where There is No Income Tax?
As you can see, it’s possible to find a state to live in where you won’t be obligated to pay state income taxes. If you have a high enough income that a state income tax would significantly affect your ultimate take home, it’s worth considering moving to one of the states that leaves that income alone, if your occupation allows it.
The approach I recommend for deciding where to ultimately live based on financial benefit involves considering your income, the state’s taxing strategy (or lack of it), your housing needs (wants as well, if you’re affluent), and your spending habits. Aside from these financial considerations are other factors such as weather, crime, proximity to family and other interests.
Hopefully the information I’ve presented here has given you the education you were seeking on the states that have no income tax and other factors related to preserving and using income.
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