Living in a state that does not tax income can be a major benefit, especially for high-income families. This enables high earners to save much more of their earnings.
Tax Burden and Affordability Rankings
The first two columns show the state’s total tax burden (state income taxes + sales and excise taxes + property taxes) as a percentage 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.
States without income tax often raise other taxes to offset revenue loss. Consider full tax picture before moving to no income tax state.
Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming are the only states that do not levy a state income tax.
Alaska relies on revenue from mineral lease rentals and royalties. It has second lowest tax burden. Alaska ranks low for tax burden and high for affordability.
Florida relies on tourism revenue.
Nevada’s economy is fueled by entertainment and hospitality.
New Hampshire taxes some dividends and interest.
Tennessee recently eliminated its tax on investment income.
Texas and New Hampshire have high property taxes.
Wyoming relies on property, oil, sales and excise taxes for revenue. Wyoming scores above average for cost of living and housing affordability.
Pros and Cons of Living in a Tax-Free State
In some cases, having no state income tax does translate to lower revenue for individual states. This may result in lower state spending on basic services.
The biggest benefit of moving to a place with no income state income tax is a lower tax bill. If you have a high income, avoiding state income taxes can be especially helpful.
While you might not have to pay state income tax, your overall tax bill actually might end up being higher, depending on your lifestyle.
With no state income tax — the state constitution forbids it — Florida’s state government generates the bulk of general revenue from sales tax collections.
Most states will generate revenue through income taxes, sales tax, property tax, and other higher fees on goods like tobacco and alcohol in the U.S.
Be aware that if a state doesn’t impose state income tax, it typically makes up for it by raising taxes elsewhere.
If you move to a state with no income tax but don’t make much money, then the money you do make might not go as far.
Wyoming is the most tax-friendly state, where residents pay $3,438. Alaska offers the lowest total tax burden of any state, costing taxpayers an average of 5.06% of their income. In fact, Alaska is the only state to charge no sales tax and no income tax at all, including taxes on investment income.
For a typical middle-class family, the tax burden difference between living in the highest-tax state (Illinois) and the lowest-tax state (Wyoming) is $11,340 per year.
Alaska does charge relatively high property taxes (the 11th highest in the U.S.). The state sales tax rate in Wyoming is a modest 4%. The median property tax on a $300,000 home in Arizona is only $1,932 a year, which is fairly below the median property tax in most states. However, it is true that the state’s sales tax is higher than the average. It begins with a 5.6% state sales tax.
Taxpayers in the highest-taxed states pay up to three times more in state income tax than those in states with the lowest taxes. When you’re choosing a state with the lowest tax burden, it’s not as simple as just looking at the cost of income tax. There’s also local property tax.
Alaska is one of the most tax-friendly places to live in the U.S., and is the only state to have no levied sales tax or state income tax. According to its 2018 Kiplinger Tax Map, the most tax-friendly states, from No. 1 to No. 10, include Alaska, Wyoming, South Dakota, Florida, Nevada, North Dakota, Delaware, Arizona, Mississippi and Louisiana. As for the 10 least tax-friendly states, Minnesota tops the list.