Right now, nine states do not charge state income taxes, which means residents in those states don’t need to file a state-level tax return. While an obvious benefit of that is a reduction in their annual tax liability, are there also drawbacks to living in a state without income taxes?
Here, learn the pros and cons of no state income tax. This intel can help you determine if living in a state with no income tax is better for you.
Key Points
• Living in states without income tax can significantly reduce an individual’s overall tax burden, benefiting primarily high-income earners during tax season.
• Higher sales and property taxes often compensate for the lack of income tax, potentially placing a heavier burden on lower-income residents in these states.
• Tax filing becomes simpler for residents in states without income tax, eliminating the need for state tax returns and associated expenses for tax preparation.
• The absence of income tax can lead to reduced funding for essential public services, such as education and infrastructure, impacting the quality of life.
• Although no income tax may attract new residents, the overall cost of living in these states can still be relatively high, complicating financial advantages.
Which States Have Zero State Income Tax?
Currently, nine states do not have state income tax on earned income:
• Alaska
• Florida
• Nevada
• New Hampshire*
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming
*New Hampshire currently charges state taxes on interest and dividends but not on income, but it is set to phase this out after 2026, as Tennessee has recently done.
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What Are the Pros and Cons of Having No State Income Tax?
At first blush, having no state income tax sounds like a win for Americans — and for many high-earners, it might be. However, there are also downsides to living in a state with no income taxes. Here’s a closer look.
Pro: You’ll Spend Less Money on Income Taxes Overall
While nearly everyone must file federal taxes, residents in states without income taxes will benefit from a lower overall tax bill each tax season. This can be a boost to one’s financial health.
Con: You’ll Likely Spend More on Sales and Property Taxes
Just because states don’t charge income taxes doesn’t mean they’re not getting revenue through different types of taxes. States without income taxes sometimes have higher sales and property taxes, for example.
Tennessee, Washington, Nevada, and Texas are all in the top 20 states with the highest combined state and local sales tax. New Hampshire, Texas, and Florida all have property taxes higher than the national average — with the former two in the top 10 states overall.
An added con to this: Unlike income taxes, which get progressively higher based on your income level and resulting tax bracket, sales taxes are the same no matter how much you make. That means lower-income taxpayers shoulder a heavier tax burden in states with no income taxes, according to the Institute on Taxation and Economic Policy.
Pro: Tax Filing Is Easier
If you live in a state without income tax, filing can be a breeze. You’ll have one less tax filing deadline to worry about.
Those who reside where state tax is collected, however, may need to invest in professional tax software or an accountant to handle their state taxes. This is of course an added expense — and creates extra steps in the tax filing process.
Con: There’s Less in the Budget for Infrastructure and Education
States use income taxes to fund projects like improving infrastructure and investing in education. Without income taxes, there could be less in the budget for such investments.
For instance, Nevada, Florida, Tennessee, and South Dakota are all among the top 10 states that spend the least amount of money per K-12 student, per a report from the Education Data Initiative. The common thread? These four states don’t have income taxes.
Pro: Having No Taxes Can Attract People to Move to the State
A lack of state income taxes may be a selling point for many people looking to move, whether they are looking for a more affordable lifestyle, a welcoming state to retire in, or to be closer to friends and family.
Why does this matter? An influx of residents to a state can be a boon to the local economy.
Con: Cost of Living May Be Higher
Though it’s not the case across all nine states without income taxes, the cost of living could be higher. Four out of the nine states were among the 20 most expensive states to live in last year: Alaska, New Hampshire, Washington, and Florida.
Now, here’s how the pluses and minuses stack up in chart form:
| Pros | Cons |
|---|---|
| Less money spent on income taxes | Potentially higher sales and property taxes |
| Easier tax filing | Potentially lower infrastructure and education spending |
| Potential state population growth | Potentially higher cost of living |
Why Do Some States Have Zero State Income Taxes?
Some states may choose to enact a no-state-income-tax policy to encourage Americans to move there from other states and thus boost their economy. IRS and Census data backs up this theory.
It may also reflect local political sentiment: Conservative politics tend to favor lowering taxes, while progressive politics often prioritize the social programs that can be achieved through higher taxes.
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Do States With No Income Tax Save Residents Money?
States with no income taxes save residents money — on their income taxes. However, many states without income taxes can be expensive in other ways. They might have a higher sales tax, higher property taxes, and/or a higher cost of living.
Before deciding on a move to a state without income taxes, it’s a good idea to view the whole picture by researching sales and property tax rates and overall cost of living.
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Is Living in a State With No Income Tax Better?
Some taxpayers may say that living in a state with no income tax is better, but others might not. In general, high-income earners benefit more from a lack of state income taxes, since they may enjoy reduced taxes. Low-income earners, however, may actually shoulder more of the tax burden when states generate revenue from sales tax.
Taxpayers should also consider how much they value lower taxes versus more social programs and investments in things like infrastructure and education. Each individual will have their own opinion.
The Takeaway
States without income taxes may save you a lot of money when it’s time to file taxes, but there may be hidden costs of living in such states, like higher sales and property taxes. Before moving, it’s important to consider the full picture to better understand the potential impact on your finances.
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FAQ
Are other taxes higher in states with no income tax?
Though it varies, it is common for states without income taxes to make up for that lack of revenue through other forms of taxes, primarily sales and property taxes.
Are food costs more in states with no income tax?
Food costs contribute to a state’s total cost of living. In 2022, four of the 20 most expensive states to live in had no income taxes. While that doesn’t inherently mean food costs are higher in such states, it may validate that a disproportionate number of states with no income tax have higher costs of living.
Is living in a state with no income tax better for low- or high-income taxpayers?
High-income taxpayers benefit more from living in states with no income taxes. The more money you make, the higher percentage of your income you must pay in taxes, so high-earners will likely save more.
In addition, states with no income tax may see less spending on education, which can affect the quality of learning for students. High-income earners can probably more easily afford private schools for their children; such schools do not rely on taxes to operate. Low-income earners may not be able to afford private schools.
Photo credit: iStock/mihailomilovanovic
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