Everybody wants a lower tax bill. One way to accomplish that might be to live in a state with no income tax. As of 2019, seven states—Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming—levy no personal income tax. Two others, New Hampshire and Tennessee don’t tax wages. They do currently tax investment income and interest, but both are set to eliminate those taxes soon. That will bring the number of states with no income tax to nine by 2025.
- 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.
Before you pull up stakes and hire a moving company to one of these enlightened lands, however, you might want to consider other factors such as sales, excise, and property taxes; affordability; and the impact of lower taxes on a state’s ability to invest in infrastructure, education, healthcare, and other important services.
Let's look at life in each of them.
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 5.10% of personal income, the lowest of all 50 states. For comparison, New York’s tax burden is 12.97% of income, according to WalletHub. All citizens 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 projected per citizen dividend payment for 2019 is $3,000.
The cost of living in Alaska is high, though, mostly due to the state’s remote location. 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.”
This popular snowbird state features warm temperatures and a large population of seniors. Sales and property taxes in Florida are above the national average, but the overall tax burden is just 6.56%—the third-lowest in the country. Florida ranks 35th in affordability, 10 places higher than Alaska, but it 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.
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 8.26% of personal income for Nevadans, worst of all states with no income tax but still a very respectable 22 out of 50 when compared to all states. That said, the high cost of living and housing puts Nevada only eight from 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.
Like many no-tax states, South Dakota counts on revenue from taxes on cigarettes and alcohol. The home of Mount Rushmore has higher-than-average property taxes but lower sales-tax rates than many other states; plus, it features a tax-friendly climate for retirees. The combination of high property taxes and South Dakota’s unique position as home to several major companies in the credit card industry all help keep the state’s residents income-tax free.
South Dakotans pay just 7.28% of their personal income in taxes, according to WalletHub, putting the state eighth in terms of overall tax burden. The state ranks 14th in affordability and an impressive 20th on the U.S. News & World Report “Best States to Live In” list.
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 8.18% of personal income. Nevertheless, Texans’ overall tax bite is still one of the lowest in the U.S., with the state ranking 18th.
One advantage of living in a no-tax state is that the Tax Cuts and Jobs Act (TCJA)-imposed $10,000 cap on state and local tax (SALT) deductions will likely not have as great an impact as it does on residents of high-tax states, such as California and New York.
Washington hosts a young population 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 19 out of 50, with an overall tax burden of 8.20%. An unusually higher-than-average cost of living and housing hurts Washingtonians, putting the state six 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.
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 7.51%, ranking the state 10th.
Like Alaska, Wyoming taxes natural resources, primarily coal and oil, to make up for the lack of a personal income tax. The state ranks a respectable 28th in affordability and 31st on the list of “Best States to Live In.”
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 1% per year until the tax was eliminated by 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, the gasoline tax is high too.
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 6.28%, 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.
New Hampshire does not tax earned income but does tax dividends and interest. New Hampshire’s Senate recently passed legislation to phase out the investment income tax 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 6.86% according to WalletHub, ranking the state fifth in the nation. This has not come without cost: The state’s poor contributions to higher education, for example, have resulted in some of the most expensive two- and four-year colleges in the U.S. Nevertheless, the state ranks second on the U.S. News & World Report list of “Best States to Live In.”
Comparison of 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.
|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)|
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 there.