Everybody wants a lower tax bill. One way to accomplish that might be to live in a state with no income tax. As of 2021, seven states — Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming — levy no state income tax. Two others, New Hampshire and Tennessee, don't tax earned wages. While Tennessee used to tax investment income and interest, the Hall income tax was fully repealed on Jan. 1, 2021. New Hampshire currently taxes investment income and interest, but it is set to eliminate those taxes soon. That will bring the number of states with no income tax to nine by 2024.
Before you pull up stakes and hire a moving company to one of these enlightened lands, however, you might want to consider other factors, including:
- Sales, excise, and property taxes
- The impact of lower taxes on a state's ability to invest in social services, such as infrastructure, education, or healthcare
- States with no income tax often make up the lost revenue with other taxes or reduced services.
- A state's overall tax burden, which measures the percent of income paid in state and local taxes, could be a more accurate measure of its affordability than its income tax rate alone.
- Other factors — including healthcare, cost of living, and job opportunities — are also important in determining how expensive a state is.
States With No Income Tax
The table below illustrates the differences among states with no income tax. The first two columns show the state's overall tax burden (state income taxes + sales/excise taxes + property taxes) as a percent of personal income followed by the rank that the state holds (best to worst) among all 50 states.
The third column shows the state's affordability ranking, which combines both the cost of housing and cost of living, and the last column includes the state's rank on the U.S. News & World Report "Best States to Live In" list.
These figures are as of the most recent reports: 2020 for overall tax burden, 2018 for affordability, and 2019 for "Best States to Live In."
|Comparison of States With No Income Tax|
|No-Tax State||Tax Burden (% of Income)||Tax Burden Rank (1=lowest)||Affordability (1=best)||Best State to Live in (1=best)|
Pros and Cons of States With No Income Tax
Alaska has no state income or sales tax. The total state and local tax burden on Alaskans, including income, property, sales, and excise taxes, is just 5.16% of personal income, the lowest of all 50 states. For comparison, New York's tax burden is 12.28% of personal income, the highest in the nation.
All residents of Alaska receive an annual payment from the Alaska Permanent Fund Corp. made up of revenue and investment earnings from mineral lease rentals and royalties. The per citizen dividend payment for 2020 is $992.
The cost of living in Alaska is high, though, mostly due to the state's remote location. Alaska also levies the second highest beer tax of any state in the union at $1.07 per gallon, bested only by Tennessee. The state ranks 45 out of 50 in affordability and 44 out of 50 on the U.S. News & World Report list of "Best States to Live In."
Alaska has both the highest and fastest-rising healthcare costs of any state in the U.S. That said, at $11,064 per capita in 2014, the most recent year the Centers for Medicare and Medicaid Services (CMS) Office of the Actuary reported statistics, it also spent the most on healthcare, excluding the District of Columbia. At $17,726 per pupil, it also spent the most on education of any state in the western U.S. in 2018. In 2017, Alaska's infrastructure received a grade of C- from the American Society of Civil Engineers.
This popular snowbird state features warm temperatures and a large population of retirees. Sales and property taxes in Florida are above the national average, but the overall tax burden is just 6.82% — the fifth lowest in the country. Florida ranks 35th in affordability, 10 spots higher than Alaska, but it is still not as affordable as most states due to higher-than-average cost of living and housing costs. On the other hand, Florida comes in at 13 on the U.S. News & World Report "Best States to Live In" list.
In 2018, Florida was the third-lowest southern state in terms of school system spending as well as the lowest spending on this list, at $9,346 per pupil. In 2016, the American Society of Civil Engineers gave Florida a C grade for its infrastructure. One year earlier, Florida received the same grade from the Education Law Center for the fairness of its state school funding distribution. In 2014, its healthcare spending per capita was $8,076, $31 more than the national average.
Nevada relies heavily on revenue from high sales taxes on everything from groceries to clothes, sin taxes on alcohol and gambling, and taxes on casinos and hotels. This results in an overall state-imposed tax burden of 8.39% of personal income for Nevadans. It is the highest ranking overall tax burden of the states on this list, but still a very respectable 24 out of 50 when compared to all states.
That said, the high cost of living and housing puts Nevada near the bottom (42) when it comes to affordability. The state ranks 37th on the U.S. News & World Report "Best States to Live In" list.
Its spending on education in 2018 was $9,417 per pupil, the fourth-lowest in the western region of the U.S. The American Society of Civil Engineers gave Nevada a grade of C during the same period. In addition to receiving an F grade from the Education Law Center in 2015, Nevada was also the worst state overall in terms of the fairness of its state school funding distribution. Nevada's healthcare spending in 2014 was $6,714 per capita, the lowest on this list and the fourth-lowest nationally.
4. South Dakota
Like many no-tax states, South Dakota counts on revenue from taxes on cigarettes and alcohol. The home of the Lakota Sioux and the Black Hills has higher-than-average property-tax rates but lower sales-tax rates than many other states. It also features a tax-friendly climate for retirees. South Dakota's unique position as home to several major companies in the credit card industry, in addition to higher property tax rates, helps to keep the state's residents income-tax free.
South Dakotans pay just 7.86% of their personal income in taxes, according to WalletHub, putting the state 11th in terms of the overall tax burden. The state ranks 14th in affordability and 20th on the U.S. News & World Report "Best States to Live In" list.
South Dakota spent $8,933 per capita on healthcare in 2014, the 14th highest in the nation. Although it spent more money on education, at $10,073 per pupil in 2018, it spent less than any other midwestern state. Additionally, it received a grade of F for its school funding distribution. While South Dakota hasn't received an official letter grade from the American Society of Civil Engineers, much of its infrastructure is notably deteriorated, with 18.6% of bridges rated structurally deficient and 90 dams considered to have high-hazard potential.
The Lone Star State loathes personal income taxes so much it decided to forbid them in the state's constitution. As infrastructure and services must be paid for somehow, Texas relies on income from sales and excise taxes to foot the bill.
In some jurisdictions, sales taxes can be as high as 8.25%. Property taxes are also higher than in most states, with the net result being an overall tax burden of 8.20% of personal income. Nevertheless, Texans' overall tax bite is still one of the lowest in the U.S., with the state ranking 19th. Texas is average for affordability at 23rd in the nation, but it was ranked 38th by U.S. News & World Report in the "Best States to Live In" list.
One advantage of living in a no-tax state is that the $10,000 cap on state and local tax (SALT) deductions imposed by the Tax Cuts and Jobs Act will likely not have as great an impact as it does on residents of high-tax states, such as California and New York.
Texas spent $9,606 per pupil on education in 2018, the sixth lowest out of 17 southern states, and it received a D grade for its school funding distribution in 2015. In 2017, the American Society of Civil Engineers awarded it a marginally higher grade of C- for its infrastructure. Texas spent $6,998 per capita on healthcare in 2014, the seventh-lowest amount in the U.S.
Washington hosts a young population, with only 15.9% of residents over the age of 65, and many major employers, thanks to no state-mandated corporate income tax. Residents do pay high sales and excise taxes, and gasoline is more expensive in Washington than in most other states. The state comes in at 22 out of 50, with an overall tax burden of 8.32%.
An unusually higher-than-average cost of living and housing hurts Washingtonians, putting the state sixth from the bottom at 44th in affordability. For some residents that might not matter, as their state was ranked by U.S. News & World Report as the overall best state to live in for 2019.
Washington spent $7,913 per capita on healthcare in 2014, $132 below the national average. Conversely, at $12,995 per pupil, it spent more on education than most in 2018, though it received a C grade for its school funding distribution three years earlier. In 2019, Washington earned the same grade for its infrastructure from the American Society of Civil Engineers.
With an estimated six people per square mile, Wyoming is the second least densely populated state, bested only by Alaska, which has roughly one human for every square mile. Citizens pay no personal or corporate state income taxes, no retirement income taxes, and enjoy low property and sales tax rates. The overall tax burden — including property, income, sales, and excise taxes as a percentage of personal income — is 6.47%, ranking the state fourth lowest.
Like Alaska, Wyoming taxes natural resources, primarily oil, to make up for the lack of a personal income tax. The state ranks an average 28th in affordability and 31st on the list of "Best States to Live In."
In 2018, at $16,224 per pupil, Wyoming was one of the highest spenders on education in the western U.S., second only to Alaska. It also earned a grade of A for its school funding distribution in 2015, the best on this list. Wyoming's healthcare spending in 2014 was more moderate by comparison, at $8,320 per capita. Although Wyoming hasn't received an official letter grade for its infrastructure yet, the American Society of Civil Engineers found that 9.9% of its bridges are structurally deficient and 99 of its dams have a high-hazard potential.
Before 2016, Tennessee taxed income from investments, including most interest and dividends, but not wages. Legislation passed in 2016 included a plan to lower taxes on unearned income by 1% per year until the tax was eliminated at the start of 2021. To make up the shortfall, Tennessee levies high sales taxes and the highest beer tax of any state in the union at $1.29 per gallon.
With full implementation of the new legislation, Tennessee expects to attract retirees who depend heavily on investment income. The state's total tax burden is 6.18%, the third lowest in the nation. In the affordability category, Tennessee ranks 22nd overall, and on the U.S. News & World Report “Best States” list it ranks 30th.
In 2018, at $9,544 per pupil, Tennessee ranked just under Texas in terms of education spending in the southern U.S. It did a somewhat better job than the Lone Star State of fairly distributing its school funding, earning the Equality State a C in 2015. A year later, the American Society of Civil Engineers gave Tennessee the same grade for its infrastructure. At $7,372 per capita, Tennessee ranked 39th in terms of healthcare spending in 2014.
9. New Hampshire
New Hampshire does not tax earned income but does tax dividends and interest. New Hampshire's Senate passed legislation to phase out the investment income tax by 1% per year over five years, with full implementation by 2025. The state has no state sales tax but does levy excise taxes, including taxes on alcohol, and its average property tax rate of 2.20% is the third-highest in the country.
Even so, New Hampshire's state and local tax burden is just 6.85% according to WalletHub, ranking the state sixth in the nation. The state ranks second on the U.S. News & World Report list of "Best States to Live In" and a moderate 26th in the nation for affordability.
While New Hampshire spent more on education than any other state on this list, at $16,893 per pupil in 2018, it was the fourth-lowest in the northeastern region of the U.S. Additionally, in 2015, it earned a grade of D from the Education Law Center for its school funding distribution. New Hampshire received a marginally better grade of C- for its infrastructure in 2017. At $9,589 per capita in 2014, its healthcare spending is the ninth highest in the nation.
The Bottom Line
Despite the challenges no-tax states face, some of them seem to find a balance between low taxes, affordability, and providing a great place to live. Others struggle. One thing is clear: Low taxes alone do not provide a complete picture of the cost of living in any state listed here.
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