Living in states with no income tax is a common avenue for getting a lower tax bill. As a result, there is a strong desire to move to states with better affordability, especially among low-income earners. However, states with no income taxes do not guarantee that those states’ living costs will be any lower.
For instance, in 2021, Alaska was reported to have the lowest tax burden in the United States. But the low tax burden in no way affected living expenses as it was among the least affordable states to live in the US.
This article will tell you what income taxes are and how they work. Also, you will get to understand what it means to live in states with no income tax and gain up-to-date information from our PayStubsNow experts.
How income tax works and what it means for states with no income tax
How income tax works
Governments generate revenue to fund public services, social security, and other government obligations from Income taxes. Therefore, income taxes refer to the amount levied by the government on income generated by individuals and businesses within their area of jurisdiction.
As a result, it is up to governments to decide on their tax system. The united states operate a progressive tax system. Essentially, the high-income earners pay more tax than the low-income earners. Also, it is the responsibility of the (IRS) internal revenue service to enforce tax laws and collect taxes in the US.
What do income taxes mean for those in states with no income tax?
Being in a state that enforces taxable income means reduced take-home cash when receiving your paystub. On the contrary, you get to keep more of your earning when you receive your paystub for people in states with no income tax. As a result, there is a tendency for states with no income tax to be easily appealing. On the flip side, these states are not 100% tax-free. Also, living expenses like housing and rent can be pretty expensive.
Review of States with no income tax: updated list by PayStubsNow
Alaska
Alaska is one of the largest states in the united states and is regarded as one of the most tax-friendly states. Its overall tax burden of 5.8% for state and local taxes makes it the lowest in the US. As a result, a yearly payment is made from Alaska’s Permanent fund Corp to her residents. It means that most residents receive up to $2,000 to help with their cost of living. However, according to the US news and world report list, Alaska ranks among the lowest for best states to live in the united states–ranking 47th out of 50.
Pros
- No income taxes
- Annual stipends for residents
Cons
- Higher cost of living
- Remote state location
- Higher healthcare costs
Florida
Florida is generally known as a vacation destination state. It is located in the south and is one of the warmest. As a result, the state generates most of its revenue from excise taxes, sales, and tuition. The overall tax burden of Florida is 8.8%. Also, it ranks 41 out of 50 for best states to live in.
Pros
- Warm temperature
- Vacation destination
- low-income taxes
- Affordable schooling
Cons
- High cost of housing
- Higher healthcare costs
Nevada
Nevada generates its state revenue by imposing a higher tax burden of about 9.7%. As a result, the state tax burden is due to sales, excise taxes, sin taxes, and even groceries. According to a US news and world report, Nevada is not one of the best places to live–with an overall ranking of 41 out of 50 for affordability.
Pros
- No income tax
- State actively generates its revenue
Cons
- Higher than the normal state-imposed tax burden
- Other taxes are higher than normal, e.g., groceries
- High cost of living and housing
South Dakota
South Dakota is another no-income state and generates revenue from sin taxes and other tax avenues. For instance, it has one of the highest property taxes in the country. As a result, it can be pretty expensive owning a home in the state due to a property tax rate of 1.14%. However, it is still a great place to live and home to many retirees.
Pros
- Affordable tuition
- Affordable healthcare
- No income taxes
Cons
- Heavy tax burden
- Higher sin and other taxes
- Higher property taxes
Tennessee
Tennessee is regarded as the volunteer state because of its low property tax of 0.63%. As a result, it is pretty affordable, ranking 17 out of 50 by US News and World reports. However, the state records higher sales taxes and beer taxes of $1.29 per gallon–The highest compared to other states.
Pros
- No income taxes
- Affordable housing
- Fair education spending
Cons
- Highest beer taxes
- Higher than normal sales taxes
- High cost of healthcare
Texas
Texas is also known as the lone star state and is most passionate about no income tax. The state’s aversion to income taxes leads to a constitutional ban. Being the second-largest in the US, it depends on sales and excise taxes for revenue generation.
Pros
- No income taxes
- Average affordability
Cons
- Higher than normal property taxes
Washington
In addition to not imposing income taxes, Washinton does not levy a corporate income tax. As a result, the no corporate income tax makes the state home to headquarters of major corporations. For this reason, the state records a higher percentage of younger residents, with only 16% over the age of 65. Regardless, Washington is known for very high housing costs, making it unaffordable.
Pros
- No income tax
- No corporate income tax
Cons
- Higher sales and excise taxes on residents
- Higher than the average cost of living and housing
Wyoming
According to the 2020 census, Wyoming is home to about 576,851 residents. As a result, it is the least populated state in the US. The state depends on property, oil, sales, and excise tax for generating state revenue. It offers a slightly above-average cost of living. Also, the citizens neither pay personal nor corporate state income taxes.
Pros
- No retirement, personal and corporate state income taxes
- Lower sales tax rates for citizens
- Average affordability
- Better school funding
Cons
- Taxation on natural resources
New Hampshire
New Hampshire adopts a gradual approach towards becoming among the states with no income tax. As a result, the state still levies dividends and interest on investment income at 5% but does not tax earned income. The taxation of New Hampshire is almost indirect. Also, the state projection is that by 2027, it would have completely phased out these levies by a steady charge of 1% yearly. Another peculiarity of the state is that it doesn’t impose sales taxes but does for excise taxes and goods like tobacco.
Pros
- Relatively affordable housing
Cons
- High cost of living
- High property costs
Wrapping up
Even though it might seem like a financial relief to move to states with no income tax, it is not guaranteed. As a result, it would be best to analyze the pros and cons of these states critically. Also, you are better off considering your capacity to cope with the higher cost of living that is characteristic of most no income tax states. Hopefully, this article gives you a good place to begin your research.
FAQS: what does it mean when states have no income tax?
What does it mean when states have no income tax?
States without an income tax do not impose taxes on earned income to generate revenue. On the contrary, they derive state revenue from other sources. Examples of avenues to generate state revenue without income taxes include sales, excise tax, sin taxes, property taxes, natural resources taxation, etc.
What is the benefit of no income tax?
The primary benefit of no income tax is that people get to keep a greater percentage of their earnings. This way, they gain increased savings. Essentially, it favors those who earn higher and allows them to keep getting richer.
Can you refuse to pay taxes?
Man is completely free in his decisions. But, Paying taxes is a social obligation to every law-abiding citizen. As a result, a deliberate refusal to pay taxes will result in charges for tax evasion–a criminal offense against the IRS.
