As a resident of Los Angeles, I am intimately familiar with state income tax. More specifically, California state income tax (oh, the horror!)
Like most of the U.S., I have to account for this income tax when I’m calculating how much of my paycheck I’m actually pocketing. Depending on the state you live in, the tax could be so little you barely even notice. Or if you’re in LA like me, it could be… not so little. But there’s a select few states where residents don’t have to worry about state income tax at all.
So, what states don’t have income tax? And, more importantly, why?
What States Don’t Have Income Tax?
There are nine American states that don’t have income tax. This number is higher than many people expect, but it’s still less than 18% of states.
These states are:
It’s important to note that while none of these states impose an income tax, New Hampshire and Tennessee do tax investments — meaning, if you earn money through interest or dividends, you’ll have to pay taxes on that. Tennessee’s investment tax is expiring soon, however.
How Many Americans Don’t Have State Income Tax?
If 18% of American states don’t have income tax, how many people does that translate to? Well, let’s look at the populations of those states.
The total population of the United States is approximately 327,200,000, and the total population of these nine states is around 70,893,410.
That means that the residents of these nine states make up about 22% of everyone in America. So, 22% of Americans do not have to pay state income tax.
Why Is There No State Income Tax?
Not only did you come here to learn what states don’t have income tax, but you’re probably wondering why. After all, the rest of us have to sacrifice it like the responsible taxpayers that we are.
Each state has its own unique government that imposes different taxes on its residents. States without income tax have different tax systems than the ones that do — and they’re not necessarily better. Oftentimes they make up for this lost tax revenue through other taxes, or simply offer less services to their residents.
So let’s go through each state and see why they don’t have income tax. Data is provided by Investopedia.
Alaska: The most tax-friendly state in America, Alaska lacks both a state income tax and a sales tax. In fact, residents pay just 5.10% of their income in state taxes. This sounds like a sweet deal at first glance, but Alaska also has one of the highest costs of living in the U.S. Due to its remote location, Alaskans spend a lot more on things like groceries and healthcare.
Florida: Florida is another very tax-friendly state, ranking third-best in America. Residents pay only 6.56% of their income in state taxes, despite having higher property and sales taxes. It’s also more affordable than Alaska — and a lot warmer, too! However, due to its year-round pleasant weather, housing costs and overall cost of living are higher than average.
Nevada: Residents of Nevada cough up 8.26% of their income on state taxes — which is still better than 28 states. However, it’s the worst of the nine states with no state income tax. Nevada makes up for their lack of income tax by viciously taxing consumer goods instead, which makes sense considering their tourist industry. They also have high costs of living and housing.
New Hampshire: While New Hampshire has no state income tax, it does tax investment income. But this tax is being phased out over five years, so residents will soon be able to get their stock returns tax-free. It also has no sales tax. However, the state has the third-highest property tax in the nation, and high taxes on certain goods such as alcohol. Even so, people who live in New Hampshire pay just 6.86% of their income to the state.
South Dakota: Residents of South Dakota enjoy paying just 7.28% of their income on state taxes. With lower-than-average sales taxes, the state makes up for it through taxes on cigarettes and alcohol. They also tax property at a higher rate. But, overall, South Dakota ranks well in affordability, especially for people looking to retire.
Tennessee: Tennessee is the second state to have no state income tax but still tax investments. However, while New Hampshire’s investment tax will be gone by 2025, Tennessee’s will be gone in 2021. Residents pay 6.28% of their income on state taxes, which is third-best in the nation, and Tennessee offers low costs of living and housing. The state makes up for no income tax through higher sales tax (and the highest beer tax of any state).
Texas: Everything’s bigger in Texas. That is, except for the taxes. This state ranks 18th-best in America in taxes, with residents paying 8.18% of their income to the government of Texas. However, Texas does feature fairly high property and sales taxes; with sales tax being as high as 8.25% in certain cities.
Washington: Washingtonians pay 8.20% of their income to the state. Having no state income tax, however, is made up for through harsh sales and excise taxes, and one of the highest costs of living in the U.S. According to Zillow, the state has a median list price of $419,000, and in Seattle it’s over $700,000. However, Washington state was ranked as the best state to live in for 2019 by U.S. News & World Report.
Wyoming: Wyoming is 10th-best in the country for taxes, with no personal, corporate or retirement income taxes. It also boasts low sales and property taxes. To make up for it, Wyoming taxes coal and oil at a higher rate, much like Alaska.
States With No Income Tax
So, to summarize, what states don’t have income tax?
Nine; including Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
However, not having an income tax doesn’t automatically make these states more affordable. When you’re moving to a new state, you have to take into account all of its tax rates, including property, sales, and excise taxes. Some even tax investments. You also have to factor in housing and overall cost of living, which is usually higher in the West and Northeast.
Not having a state income tax may save you some time when tax season rolls around, but it might not save you money.