As of 2021, 9 States With No Income Tax As
Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming — have no income taxes. New Hampshire, however, taxes interest and dividends, according to the Tax Foundation
What to consider before moving to a state with no income tax
While moving to a state with no income tax may sound appealing, it comes with trade offs. States with no income tax often make up for the loss of revenue to the state by charging residents a higher sales, property or excise tax (taxes on goods like fuel, tobacco and alcohol).
For instance, Tennessee has the highest combined sales tax rate in the nation at 9.53%, according to the Tax Foundation, a D.C.-based think tank. Washington state has one of the highest tax rates on gasoline in the nation, at 49.4 cents per gallon. Of all states, New Hampshire and Alaska rely the most on property taxes, with tax collections accounting for 67.6% and 51.8%, respectively, of their revenue.
Taxes are also a big source of income that the state uses to finance public services such as infrastructure, healthcare and education. Lower taxpayer dollars likely translates into lower funding for these initiatives.
South Dakota, for example, spends the lowest on education of all states in the Midwest, at $10,073 per pupil per year. Nationwide, the average school spending per pupil is $12,612, and Florida, Nevada, Tennessee, Texas all spend less than the average.
To weigh another state's affordability, consider these above factors as well as the overall cost of living and job opportunities in your field. Leaving a big city, for example, you may have to accept certain trade-offs, such as a lower paying job for more affordable real estate.
And even if you live in a no-income-tax state, you'll likely still owe federal income taxes if your total income is more than the standard deduction. This is based on your age and filing status, but you can use a federal income tax calculator like this one from SmartAsset to determine just how much you can expect to pay.
Why move to states without income tax
The benefit of moving to a state with no income tax is straightforward—you don’t have to pay state tax on your income. For people with higher incomes, this is a valuable benefit.
Unlike sales or property taxes, income tax is usually based on how much you make. If you make over a certain amount, you’ll usually pay more income tax. Therefore, if you live in a state without income tax and make a high income, then you’re generally not paying more in taxes than state residents with lower incomes.
States with no income tax are also helpful for retirement income. If you move to a state without income tax, those laws should also extend to your retirement fund.
But states with no state tax have some pitfalls
There are a few reasons why moving to a state without income tax isn’t always beneficial. The first and main reason is that the level of benefit in moving to one of these states is directly tied to your level of income. If you don’t make a high income, then paying no income tax is less helpful.
States without income tax still need tax money, so they get that money through other taxes, like property and sales taxes. As a general rule, states with no income tax have much higher property and sales taxes.
So 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. Due to the higher sales taxes, you’ll be paying more for goods and services in the state. And if you want to own property, then the chances are you’ll also have to pay a higher property tax.
Aside from income concerns, you could still be subject to an income tax even if you live in a state without one. If you make money from a business that’s located in a state with income tax, then you could still be liable for taxes in that state.
Is a state with no income tax better or worse?
The new tax bill reduced the deduction for state income taxes
Officials in states with higher individual income tax rates — think California and New York — are less than thrilled about a provision in the new tax code that capped the state and local tax (SALT) deductions that residents can claim at $10,000.
The old tax code allowed taxpayers who opted to itemize instead of take the standard deductions — formerly $6,350 for single filers and $12,700 for couples filing jointly — to deduct all of the property taxes they paid to state and local government agencies as well as their tally from either sales taxes or individual income taxes.
Since most people rack up more individual income taxes, that is the category they choose to deduct. The changes leave some likely owing more, economists say.
It’s more business as usual for people living in a state without individual income taxes because those residents were by default either taking the standard deduction or subtracting the amount they paid in sales and property taxes from their federal tax bills. Without making some big purchases or holding a substantial real estate portfolio, it will likely be harder to hit the new $10,000 cap.
There are other ways to get you
State governments use taxpayer dollars to fund road maintenance, law enforcement agencies and other public services. The funding for those services typically comes from three key areas: property taxes, sales taxes and income taxes.
States without a personal income tax might ask residents and visitors to pay more sales tax on groceries, clothes and other goods, as is the case in Nevada. Or like in New Hampshire, homeowners end up paying more on their property tax bills compared with those in neighboring states.
Tennessee, for example, had the highest combined sales tax rate in the country in 2019, according to the Tax Foundation. The Volunteer State, which reviles income taxes so much that voters changed the Tennessee constitution in 2014 to forbid these taxes for good, charges a 7 percent sales tax statewide. When combined with local sales taxes, the combined rate increases to an average of 9.47 percent.
Overall, the seven states without income taxes, plus New Hampshire and Tennessee, had an average sales tax rate of 6.99 percent — 56 basis points higher than the average for the other 41 states, according to the Tax Foundation’s data.
In New Hampshire, homeowners pay some of the highest effective property taxes in the nation, according to an analysis by ATTOM Data Solutions. The Granite State also continually ranks poorly for contributing funds to higher education and has some of the most expensive two-year and four-year colleges in the nation when looking at average tuition and fee prices, according to the College Board.
In Washington, pump prices are routinely among the highest in the country — in part because of a high gasoline tax. As of 2019, Washington charges 49.5 cents per gallon in gas taxes and fees, the third-highest in the country behind Pennsylvania and California, according to The Energy Information Administration.
Elsewhere, Texas and Nevada have above-average sales taxes, and Texas also has higher-than-average effective property tax rates. Florida relies on sales taxes, and its property taxes are above the national average. Wyoming and Alaska make up for the lost income tax revenue through their natural resources. Both states enjoy hefty tax revenues from coal mining and oil drilling operations.
All of those extra taxes contribute to higher-than-average living expenses in some of those states. Washington, New Hampshire, Nevada, Florida and South Dakota were among the 24 states with the highest cost of living in 2018, according to data compiled by the Council for Community & Economic Research. Alaska is also among the most expensive places to live, but a big part of that is because it’s so remote.
More pressure on the poor
While the jury’s still out on the benefits of living in a state with no income tax, experts agree that there is one clear result for those states that do levy an income tax.
It helps the poor.
An income tax is a classic tool for redistributing wealth. It’s usually “progressive” in nature, meaning that it taxes higher earners at a greater rate than lower earners. Other taxes typically don’t have that Robin Hood-like characteristic. Sales taxes, for example, are considered “regressive.” They don’t change depending on the income level of the consumer. They treat everyone the same. So do levies on food, gasoline and other key consumable items.
These taxes place an unfair burden on the poor, according to research from the Institute on Taxation and Economic Policy. The reason is the lowest earners in the state devote the lion’s share of their take-home pay to buying things that are subject to sales taxes. The wealthy, who can save a chunk of their income in their 401(k)s and other investments, have a much smaller proportional exposure to the sales tax.
“It’s extremely difficult to fund government adequately and sustainably when families with the largest incomes are contributing the least,” says Carl Davis, research director at the Institute on Taxation and Economic Policy in a statement.
Don’t expect an economic benefit
Advocates for abandoning personal income taxes are driven by the same line of thinking: Cutting the income tax will boost take-home pay for everyone. It’ll make the state more attractive than its neighbors, drawing new businesses, creating jobs and sparking an influx of talented workers.
But does this really happen? A variety of economic policy groups have pushed back over the past few years, raising questions about whether any of those claims are true.
When you put the top nine states with the highest individual tax rates against the nine states that don’t go after a piece of workers’ paychecks, data shows team no-tax had a higher average population growth rate from 2006 to 2016 — 11.9 percent compared to 5.6 percent, according to the Institute on Taxation and Economic Policy.
However, the ITEP points out “the more significant finding is that the no-tax states have struggled to add jobs at a rate sufficient to keep pace with their growing populations. Employment growth trailed population growth by roughly 41 percent in the no-tax states, compared to 19 percent in the states with the highest top tax rates.”
Wyoming, home to a great deal of the nation’s coal and oil and gas activity, saw one of the larger gaps between job creation and population growth, according to the 2017 report. The Cowboy State traditionally shifts more of the tax burden onto the energy industry. While that might work during boom times, bust times create funding challenges.
2021-09-20, 309👍, 0💬
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