7 States With No Income Tax

By Katie Adams | February 10, 2010 AAA
7 States With No Income Tax

As April 15 nears you may find yourself wishing you could keep a little bit more of your paycheck. In fact, you can. What you pay in taxes is affected by where you live, and many states have lower state income tax rates. Nine states - Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming, Tenessee and New Hampshire - impose no state income tax. Here we look at seven of those. But before you pull up your stakes, you might want to consider a few other important factors.

Alaska
While Alaska is most commonly known for spectacular scenery and former Governor Sarah Palin, according to Forbes.com it is also the seventh-best state for women's earnings, where women earn an average $719 per week. However, those benefits are somewhat offset by the fact that it also has one of the highest costs of living in the nation and still-climbing foreclosure rates. What may be more concerning is that more Alaska homeowners have gone into foreclosure as a result of job loss (due to a volatile economy) than because of the terms of a subprime loan. And, while residents do not pay a state income tax, the state is still going to take its share of your paycheck through sin taxes, including one of the highest cigarette tax rates ($2 per pack) and a sky-high $12.80 liquor tax (per gallon.) Plus, if you're an extrovert Alaska's probably not the best choice for you - it's one of the least populated states in the U.S. (Did you know that many sin taxes were instituted as temporary measures? Read more in "Temporary" Taxes That Stuck.)

Florida
Florida has long been known as the snowbird state; retirees flock there for the warm climate and lack of a state income tax, making it the fourth most populated state in the nation (more than one-third of its population is 65 or older). It also has a high unemployment rate of 11.8% and eight of the top 20 metro foreclosure rates including Cape Coral-Fort Myers (11.87%), Orlando-Kissimmee (8.17%), Port St. Lucie (7.58%) and Miami-Ft. Lauderdale-Pompano Beach (7.16%). Lower property valuations are going to compound the state's projected $3.2 billion spending gap this year, but the state will recoup some of its losses (at your expense) with its relatively high 6% sales tax, gas tax (.34 cents per gallon), and liquor tax ($6.50 per gallon.) (For more on snowbird states, see Finding A Retirement-Friendly State.)

Nevada
Nevada was ground zero for the housing market collapse and it will likely take years for any significant recovery. Las Vegas had the nation's highest metro foreclosure rate in 2009 with more than 12% of housing units in the foreclosure process - that's more than fives times the national average. While the state boasts an attractive $55,570 (2006-2008) median income, that's only helpful if you can find a job - the unemployment rate stands at a steep 13%, significantly higher than 8.4% just a year earlier. Residents also pay one of the highest sales taxes in the country (6.85%) as well as one of the highest gas taxes in the country (.33 cents per gallon).

South Dakota
South Dakota has a more lot going for it than just no state income tax. It has a low 4.7% unemployment rate, a decent average median income of $49,437 and a low 4% state budget gap in 2010 compared to other cash-strapped states this year. However, there are a few downsides to consider as well: it ranks 37th overall for women's earnings, and it is the fourth-least populated state in the U.S.

Texas
The (state) income tax-free Lone Star state is the second-most populated in the U.S., featuring a predominantly young population (90% of its residents are under the age of 65). And while the state can boast two of Forbes' top 10 job markets for 2010 (San Antonio and Austin), it comes in at 34th overall for women's earnings (just $586 per week) and has a relatively high 8.3% unemployment rate. Those statistics could pose a problem, particularly because the state also has four of the 40 most costly cities in the U.S.: Austin (23rd), San Antonio (27th), Dallas (32nd) and Houston (39th). Even if you live outside those cities you'll still have to pay a high 6.25% sales tax and if you smoke it's going to cost you a steep $1.41 per pack cigarette tax.

Washington
With beautiful scenery, a young population (89% of the population is 65 and younger), and major employers like Amazon.com (Nasdaq:AMZN) and Boeing (NYSE:BA) the Evergreen State is an attractive place to live for more reasons than just a lack of state income tax. Forbes ranked it the seventh-best overall state to live in 2009 and it ranks ninth overall for women's earnings (an average $709 per week). However, it also has a comparatively high sales tax (6.5%), a steep cigarette tax ($2 per pack), and a high 9.5% unemployment rate. In addition the state is facing a steep 26% projected state budget gap in 2010, which could impact services for residents.

Wyoming
The least-populated state in the U.S. was ranked by Forbes as the third-best place to live in the U.S. last year, landing in the top four for well-being, physical health, emotional health, life evaluation and work quality. It also has a relatively high average median income of $51,396 and a predominantly young population (87% of the state is age 64 or younger). However, unemployment has more than doubled since 2008 and major employers are scarce.

Conclusion
The grass can always seem greener on the state tax-free side of the fence, but if you dig a little deeper you might find that your own state suits you better - even if you do have to pay a little bit more come tax time.

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