Every April, Uncle Sam knocks on your door looking to collect. It’s just part of life. But where you live will dictate just how much tax you’ll pay, whether in April or throughout the year.
Residents in some states don’t have to pay sales tax on purchases or income tax, which comes out of their paycheck. If you’re a retiree, this is often good news for you. It means your Social Security benefits, pensions and other retirement income doesn’t get taxed.
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Depending on state laws, a state may compensate for its lack of income tax or sales tax in other ways.
Just because your state may skip one tax, it doesn’t automatically mean cheaper living. While some states argue that no income tax helps GDP growth, the jury is still out if that’s the case. Read more to learn about states without income tax or states without sales tax.
States without income tax
When you get a job, you’re immediately prompted to fill out tax forms. These forms determine how your paycheck is taxed — most states, including Washington D.C., tax their residents’ income. Nine states in the U.S. don’t have an income tax, supplementing their budgets in other ways.
For example, Florida doesn’t have an income tax but they have a high sales tax to acquire additional revenue, especially around tourist areas. New Hampshire and Texas, on the other hand, have some of the highest property taxes in the country.
States without sales tax
Sales tax can range from two to almost eight percent, depending on the state. This tax is normally charged during the purchase of consumer goods and services. In most states, however, there’s no sales tax on food items or prescriptions.
While there’s no sales tax as we know it, some states have other related sales taxes. In Delaware, the state does add a tax on a business’s gross receipt or the total amount of goods or services sold. Companies may tack this on to the prices of their goods to alleviate the burden.
In Alaska, while there’s no formal sales tax, they do allow cities to impose a sales tax if they decide to. Most of them are under two percent on average.
No income tax doesn’t mean affordable
States use income tax to fund road repair, school systems, government services and other public items. According to the Tax Foundation, they often account for nearly 42 percent of the state government’s revenue.
No income tax doesn’t mean these states are more affordable. For these states with no income tax to fund services, they have to make it up elsewhere. The cost of living may increase due to higher sales tax every time you buy something and property taxes, making your dreams of owning a home more expensive.
For example, Tennessee doesn’t have a state income tax, but it does pile on others. The Volunteer State imposes taxes on dividends and interest earned (being phased out in 2021), a state sales tax on food, a tax rate for taxable services and a local sales tax designated by cities. That means sales tax is as close to 10 percent in some areas.
There’s no state income tax in Washington, but its high gasoline tax leads to some of the highest prices at gas stations in the country. At the same time, Wyoming and Alaska make up for the loss of state income tax by taxing their natural resources, like coal mining and oil drilling.
Do your tax research
In the end, if you’re looking to move to states without income tax or sales tax, do your research first. Understand what other taxes have been implemented and how the state makes up for lost revenue and compare it with your current expenses. Make an informed decision based on your earnings and current lifestyle to break down the pros and cons.
That little tax haven is sometimes too good to be true. The actual cost of living in that state is a different story.
