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9 States With No Income Tax: Everything You Need To Know

Sarah Li Cain6-minute read
November 15, 2021

Earning a big paycheck is great, but your employer needs to take a chunk out of it to go toward taxes. Sure, it funds important infrastructure like schools and better roads, but it’s possible to live in states with no income tax.

Yes, you read that right. States with no income tax are out there — they make up for the lack in income by raising taxes in other areas and potentially reducing services offered. If you’re wondering whether states that have income tax do better than ones that don’t, it depends. Some states that charge low to no income taxes have great job growth opportunities, though it could come at the cost of a lack of government services.

Let’s discuss income tax, plus the nine states with no income tax and how they make it work.

Income Tax: A Definition

Income tax is what the government imposes on its residents based on income earned – it's a source of revenue for them. Income tax is used to provide services and goods for citizens and to pay government obligations. While business income taxes apply to businesses and those who are self-employed, individual income taxes are based on a person's salary, wages or other form of income.

Each year, individuals and businesses need to file federal income tax returns and state ones depending on where the business or individual is located. In most cases, tax day — the deadline for when taxes are due — for individuals is April 15 of each year (or the closest weekday).

What States Don’t Have An Income Tax?

There are nine states with no income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.

Even though New Hampshire and Tennessee do not tax wages, the latter state taxed dividends and interest income until 2021, when it dropped the tax on investment income.

How Do States Without Income Tax Make Money?

State governments use revenue from income taxes to fund law enforcement agencies, economic development, environmental projects, parks and recreation initiatives and more. When you take away that stream of revenue from income taxes, these services still need to be funded. States without income taxes need to get revenue and money in other ways, such as charging sales tax, property tax and excise tax.

Alaska

Alaska makes a large amount of its money by exporting oil from the Trans-Alaska Pipeline System. Some localities still charge sales tax, but for the most part, it’s nonexistent in the state.

After the oil boom of the 1970s, Alaska eliminated all of its taxes. Then, they went a step further and decided to pay their residents. A portion of Alaska’s oil profits go into a permanent fund and get distributed to the state’s 730,000 residents each year.

The lowest of the payments was $331.29 in 1984, and the highest was $2,072 in 2015. The Permanent Fund Dividend was estimated to be $3,170 per eligible Alaskan in 2020.

Florida

Florida makes much of its money by charging high sales, hotel and property tax rates.

The state has plenty of pristine beaches, and other tourist magnets like Disney World and Universal Orlando are major sources of tax revenue for the state. All of these tourists coming from around the world to spend their hard-earned money on Florida vacations allows the state to bring in enough revenue to not have to rely on personal income tax or an elevated sales tax.

Nevada

Nevada makes money by charging high sales tax rates. Like Florida, it also makes a large portion of its revenue by attracting tourists.

Instead of white sandy beaches, Nevada has rows of massive casinos and hotels. Millions of tourists come to visit the state annually, allowing Nevada to collect over a billion dollars a year in sin taxes.

Sin tax is a type of excise tax imposed on activities and products deemed harmful to society such as gambling, alcohol and tobacco. Since major cities in Nevada like Las Vegas and Reno are known for having a plethora of these amenities, it makes sense why Nevada doesn’t need to collect income tax.

New Hampshire

New Hampshire makes a large amount of its money without an income tax by taxing interest and dividend income. What this means is that any money you earn from interest and dividends (like ones you earn from investments) counts as taxable income in the state.

New Hampshire also doesn’t have sales tax. What it does have are some of the highest property taxes in the country in order to make revenue.

South Dakota

South Dakota makes a large amount of its money without an income tax from sales tax, alcohol and cigarettes.

Tennessee

Tennessee makes its money by charging a high sales tax and beer tax. Tennessee also made money by taxing dividend and interest income, though this was phased out in 2021.

Texas

Texas makes its money by charging high sales and property taxes. These are collected by cities, counties and local school districts to be used for local needs. While this has many benefits, Texas residents pay property taxes at an average of 1.83%, well above the national average of 1.08%.

Washington

Washington makes a large amount of its money from high sales tax. The state isn’t far behind Tennessee when it comes to overall combined state and local sales tax. The total sales tax rate can be as high as 10.4% in some localities. In Seattle, it’s 10.1%.

Washington is also known for elevated excise taxes. It charges nearly 50 cents per gallon of gasoline, according to the Washington State Department of Revenue, giving it the reputation for having the second-highest gas tax in the nation.

Wyoming

Wyoming makes a large amount of its money from oil production. All in all, it relies on natural resources and mining assets to provide it with enough revenue to meet its needs.

Pros And Cons Of Income Tax-Free States

While it might seem like a great idea to live in states with no income taxes, it does have its downsides. Be sure to weigh the pros and cons if you’re debating whether to move to one of these states.

Pros

  • Promotes growth: Not paying state income taxes means you may be able to keep more of your money.
  • Creates jobs: Paying less state taxes (or none at all) can also help businesses create more jobs, and paying less taxes means skilled workers may stay in the state.
  • Redistributes wealth: Low-income folks who need every penny to live, are the ones most likely benefitting from no state income taxes – think of it as a way to redistribute wealth.

Cons

  • Impacts the poor: Sure, it can help those with lower incomes keep more of their money, but many states charge higher sales taxes. Doing so will impact this demographic, negating the positive effects of not having to pay state income taxes.
  • Hard to add jobs at a rate that can accommodate new residents: According to data from the Institute of Taxation and Economic Policy states that don’t have income taxes have higher population growth rates and can struggle to add new jobs.

States With No Income Tax FAQs

Here are some common questions about states with no income taxes.

Why do some states not have an income tax?

Reasoning varies from state to state. Some states, like Texas, have state constitutions which prohibit income taxes.

Will moving to a state with no income tax really save you money?

Removing state income taxes can save you money. However, how much you save will depend on a number of factors such as your cost of living, income tax bracket and location. There may also be a higher sales tax or fewer public services instead.

How much can you save?

Moving to a state with no income tax may be tempting, but there are other factors to consider. These include the standard (or cost of living) in one of these states, the cost of relocating, and the potential for higher property taxes.

The Bottom Line

You might be tempted to pack your parka, move to Alaska and cash in on their sweet oil dividend deal as soon as you can. But whatever state you’re interested in moving to, it’s important to do extensive research on all of the factors that are important to you and your financial health.

Enjoyed this article? Learn more about excise tax here.

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Sarah Li Cain

Sarah Li Cain is a freelance personal finance, credit and real estate writer who works with Fintech startups and Fortune 500 financial services companies to educate consumers through her writing. She’s also a candidate for the Accredited Financial Counselor designation and the host of Beyond The Dollar, where she and her guests have deep and honest conversations on how money affects our well-being.