Each state has its own way of funding programs and services in the United States, meaning taxes vary. Some states ditch income tax altogether, while some have very low income taxes, which sounds good for your wallet. However, you'll need to be cautious; states without income tax sometimes make up for it with other taxes. While the idea of no income tax is tempting, weighing the upsides and downsides and looking at the big financial picture before deciding is crucial before you relocate to a new state.
In 1932, Washington voters said no to income tax, so the state doesn't tax your paycheck. But it does tax the money you make from investments if you're a high earner. Even though there's no income tax, Washington relies a lot on other taxes like sales, property, and excise taxes.
This can hit regular folks harder. If you want lower sales taxes or a fairer tax system, you might find other states more to your taste. Remember, though, that Washington taxes high-earners' capital gains at 7% once they pass a certain income limit.
Fueled by the bustling tourism and gambling scenes in Las Vegas and Reno, Nevada rakes in big bucks without hitting residents with an income tax. They make up for it by banking on sales and gaming taxes.
The sales tax is a bit high at 6.85%, but the lighter tax load is a magnet for businesses. This setup helps them thrive, generates more jobs, and pumps up the state's economic situation.
Texas skips the income tax scene, a tradition dating back to its days as an independent republic when land taxes were the go-to. This means residents in Texas get to hold onto more of their hard-earned cash compared to high-income tax states.
Instead, Texas banks on other money streams like oil and gas production taxes and sales taxes. The Lone Star State's game plan involves luring in businesses and individuals with lower taxes, making it a key part of their economic strategy.
South Dakota keeps the tax game strong with a solid agreement on keeping taxes low. It's one of just nine states that steer clear of individual income tax.
By keeping the government smaller than most, South Dakota still pulls in enough cash through sales and property taxes to fund what it needs. While it might not be as flashy as some places, the job market in South Dakota is on the rise.
In 1968, Florida banned income taxes through a voter-approved amendment driven by distrust of government and a desire to attract retirees. Florida's economy heavily depends on tourism, which contributes significantly to sales tax revenue.
The state also boasts a sizable and expanding retirement population, which tends to be less mobile and less influenced by high taxes. Beyond taxes, while not uniform across the state, Florida has a growing job market in certain sectors like tourism, healthcare, and technology.
Wyoming keeps it simple – no personal or business income taxes here. The state's got lots of natural resources, like coal and oil, bringing in enough money so they don't need income taxes. With a small population, Wyoming's government runs smoothly without relying on income tax cash.
Businesses love it, too, since there's no corporate income tax, making Wyoming a hot spot for startups and moving companies. This setup means more jobs and a boost for the state's economy.
Alaska used to have an income tax, but it vanished in 1980 during the oil boom. Thanks to the Alaska Permanent Fund, created in 1976, they invest oil wealth and dish out yearly dividends to eligible residents, lessening the need for income taxes.
While the state doesn't have its own income tax, individual towns can throw in sales and property taxes, which can differ greatly. Alaska also slaps corporate income tax on businesses, ranging from 2% to 9.4%, depending on the corporation's size and what it does.
In Tennessee, the no-income-tax vibe goes way back to its agricultural roots, with over 91,000 farms covering nearly half of the state. Back in its farming days, land taxes were the money-makers. Today, Tennessee relies big-time on a 7% sales tax and other consumption-based taxes instead of income taxes.
This means everyone chips in for the state's bills through what they buy, no matter their income. Compared to the rest of the country, living costs and housing in Tennessee often come with a lower price tag.
New Hampshire has never had an income tax, and its residents strongly oppose its introduction. The state's “Live Free or Die” motto reflects a strong libertarian inclination toward limited government and lower taxes.
While wages and salaries escape taxation, New Hampshire does impose a 5% tax on interest and dividend income (currently being phased out, dropping to 4% in 2023, 3% in 2024, and eliminated in 2025).
North Dakota keeps it straightforward with oil and gas money, so they don't lean too much on income taxes. They have a flat income tax rate, starting at 1.1% and going up to 2.9%, which keeps the tax burden on the lower side. While there are fewer tax breaks compared to other places, it actually makes things simpler when you're filing taxes, saving the state some money on paperwork.
Arizona markets itself as a business-friendly state with low taxes to attract both companies and individuals. Recently, the state had a two-rate individual income tax system, with rates of 2.55% and 2.98%, and planned to introduce a new flat tax over three years, starting in 2024.
Arizona relies significantly on a 5.6% sales tax, which may disproportionately impact low- and middle-income earners. On a good note, growing industries like technology and tourism offer diverse job opportunities.
New Mexico employs a graduated income tax system, where rates rise with income, ranging from 1.7% to 5.9%. Although the top rates may seem relatively high, the state's effective tax rate, considering exemptions and credits, is often lower.
New Mexico provides various exemptions, including those for Social Security income and a low- and middle-income exemption, significantly reducing taxable income for many residents. While some states with low-income taxes have high sales taxes, New Mexico is unique in having neither. This can significantly lessen the overall tax burden, especially for those who purchase more goods locally.
Mississippi currently maintains a flat 5% individual income tax and a corporate income tax rate ranging from 4% to 5%. The state's game plan is about luring businesses and residents by keeping taxes low, hoping to spark economic growth and more jobs. Plus, there are no local income taxes here, so you save even more compared to places where cities or counties tack on extra income taxes. But watch out for a 7% sales tax on groceries and basics, even with the low-income tax.
In Louisiana, they keep income taxes pretty low, ranging from 1.85% to 4.25%, some of the lowest in the country. But here's the catch – the state relies a lot on sales taxes, averaging around 9.54%. Also, they don't give you a standard deduction, so you can't automatically cut a fixed amount from your income before figuring out taxes. This might hit lower earners harder, so it's worth keeping an eye on the overall tax picture in the Pelican State.
Oklahoma's state revenue often comes from oil and gas, keeping the need for high-income taxes at bay. Right now, they've got a varied income tax, ranging from 0.25% to 4.75%, and a 4.00% corporate income tax. Plus, the cost of living, covering things like housing and food, is lower than in many other states. If you're all about affordability, Oklahoma could be the budget-friendly spot you're looking for.
The income tax system in Michigan wants to be fair and rake in state funds. It's as straightforward as a flat 4.25% tax rate for everyone, but there's a hitch: it doesn't play fair with different incomes. The top 1% end up paying less in taxes than the rest, with the wealthiest cruising at a 5.7% rate while the lowest 20% hit 7.1%. It's a bit uneven, showing there's room for a fairer tax deal in Michigan.
In Rhode Island, they've got a sliding scale for income taxes, starting at 3.75% and going up to 5.99%. This helps bring in money for different things the state needs. They keep taxes lower partly by having a smaller government than some other places. But it could mean fewer services or less money for things like schools and roads. And watch out—they've got a hefty 7% sales tax, one of the highest around, plus property taxes that change based on where you are.
Alabama utilizes a graduated income tax system in which rates range from 2% to 5%, depending on taxable income. The state provides a substantial standard deduction, effectively reducing taxable income for many residents. Notably, Alabama also allows the deduction of all federal income taxes paid, offering further relief on the state tax burden, especially for higher earners. Alabama also prioritizes attracting businesses and jobs through lower taxes, hoping to stimulate the economy.