There are currently seven U.S. states that do not have a state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Residents in these states still pay federal income taxes, but they do not pay taxes on wages and other income at the state level.
Why Do Some States Have No Income Tax?
There are a few key reasons why certain states do not have a state income tax:
- They have alternative sources of revenue – For example, Alaska generates revenue from its oil industry and Texas has higher property and sales taxes.
- To attract new residents and businesses – Not having a state income tax can be viewed as a draw for people and companies looking to move or relocate.
- Political views – Some states oppose income taxes on philosophical grounds and believe funds should be raised through other means.
States without an income tax make up for the lost revenue in other ways, such as through higher sales taxes, property taxes, excise taxes, and fees. These states still fund services like education, healthcare and transportation through these alternative funding sources.
States with No Income Tax
Alaska
Alaska is the only state that does not levy a statewide sales tax either. It generates revenue primarily through taxes and royalties on oil and gas production. Alaska has an oil wealth fund that generates money for the state’s budget from invested oil revenues.
Florida
Florida derives most of its tax revenue from a 6% sales tax, 5.5% corporate income tax, and property taxes. Florida does not tax personal income but does tax interest, dividends, and other investments at lower rates.
Nevada
Nevada relies heavily on revenue from tourism and hospitality. Major sources include sales tax, gaming tax on casinos, hotel taxes, property tax, the commerce tax on businesses, and excise taxes.
South Dakota
South Dakota relies on sales, use, and excise taxes instead of income taxes. It also generates significant revenue from a state lottery, gaming, tourism, and taxes on banks and insurance companies.
Texas
Texas has higher property and sales taxes than most states. It also has a franchise tax on business margins in lieu of a corporate income tax. Severance taxes on oil and gas also contribute to the state budget.
Washington
Washington has high sales and excise taxes that fund state operations and services. Business taxes and property taxes are also larger sources of revenue than income taxes.
Wyoming
Wyoming does not have personal or corporate income taxes but derives significant revenue from taxes on coal, oil and natural gas production. Property taxes and tourism taxes also provide major funding.
State Income Tax Rates
The 43 states that do have an income tax levy rates ranging from 2.9% to 13.3%, with most falling between 4% and 6%. Some major differences in state income tax rates:
| State | Income Tax Rate |
|---|---|
| California | 13.3% (top rate) |
| Hawaii | 11% (top rate) |
| New York | 8.82% (top rate) |
| North Carolina | 5.25% (flat rate) |
| Pennsylvania | 3.07% (flat rate) |
| Colorado | 4.55% (flat rate) |
Some states like California and Hawaii have graduated income tax rates, where higher incomes are taxed at progressively higher bracket rates. Other states like Pennsylvania and Colorado use a flat income tax rate regardless of income level.
Average State Income Tax Paid
According to the U.S. Census Bureau, the average state income tax paid per person in 2019 was $2,713. This varies greatly by state, income level, and family size. The highest average state income taxes are paid by residents of:
- New York – $5,567 per person
- Connecticut – $4,919 per person
- Massachusetts – $4,707 per person
- Minnesota – $3,556 per person
- California – $3,369 per person
On the opposite end, the lowest average state income taxes paid are in states like:
- Alabama – $949 per person
- Louisiana – $1,000 per person
- Arizona – $1,168 per person
- South Carolina – $1,179 per person
- New Mexico – $1,292 per person
Keep in mind that income taxes in most states are progressive, so higher earners pay disproportionately more than lower earners. Median income matters a lot when comparing average tax bills across states.
States with the Highest Income Tax Rates
If you’re looking to minimize state income taxes, the seven no-tax states are the most appealing. Of the states that do tax income, these tend to have the highest top marginal rates:
- California – 13.3%
- Hawaii – 11%
- New Jersey – 10.75%
- Oregon – 9.9%
- Minnesota – 9.85%
- Iowa – 8.98%
- New York – 8.82%
Rates this high typically only apply to very top earners, but medium and high-income households can still get taxed at elevated rates in these states. Some municipalities like New York City and San Francisco add additional local income taxes on top of the state tax.
States with No Sales Tax
When considering a state’s overall tax burden, it’s important to note which states exempt consumer purchases from sales tax. There are 5 states with no conventional statewide sales tax:
- Alaska
- Delaware
- Montana
- New Hampshire
- Oregon
However, some municipalities in these states may charge local sales taxes. For example, Anchorage has a sales tax despite Alaska having no statewide tax.
States with Low Property Tax Rates
For homeowners, property taxes can be a significant expense that contributes to a state’s cost of living. States with relatively low effective property tax rates include:
| State | Effective Property Tax Rate |
|---|---|
| Alabama | 0.43% |
| Colorado | 0.51% |
| Delaware | 0.55% |
| Hawaii | 0.28% |
| Wyoming | 0.58% |
Conversely, states with the highest property tax rates include:
| State | Effective Property Tax Rate |
|---|---|
| New Hampshire | 2.19% |
| Texas | 1.81% |
| New Jersey | 2.13% |
| Connecticut | 1.82% |
| Wisconsin | 1.76% |
State Tax Burden by Income Level
Analyzing states just by one tax rate doesn’t give the full picture. The overall tax burden on residents depends on the combined impact of property taxes, income taxes, sales taxes and more. Studies try to estimate total state and local tax paid at different income levels.
According to a 2022 analysis, the states with the highest state and local tax burdens for a household earning $25,000 a year are:
- Illinois – 13.6% of income
- Texas – 13.3% of income
- Arkansas – 12.7% of income
- Alabama – 12.5% of income
- Louisiana – 12.5% of income
And the lowest burdens on $25,000 earners are in:
- Alaska – 5.7% of income
- Wyoming – 6.4% of income
- South Dakota – 6.5% of income
- Montana – 6.6% of income
- New Hampshire – 6.8% of income
For upper-income earners, higher property and income taxes shift things around. For $150,000 households, the highest burden states are:
- New York – 12.7% of income
- Hawaii – 11.4% of income
- Vermont – 11.1% of income
- Maine – 10.7% of income
- Minnesota – 10.6% of income
And the lowest burden at $150,000 are:
- Nevada – 7.1% of income
- Alaska – 7.1% of income
- Wyoming – 7.4% of income
- South Dakota – 7.5% of income
- Texas – 7.5% of income
Other State Tax Considerations
Inheritance Taxes
In addition to yearly taxes, 12 states levy additional taxes on inheritances and estates with assets over certain exemptions:
- Iowa
- Kentucky
- Maryland
- Nebraska
- New Jersey
- Pennsylvania
- Connecticut
- Hawaii
- Illinois
- Maine
- Massachusetts
- Oregon
- Washington
Deductions and Tax Breaks
Some states allow deductions or exemptions on tax returns to lower overall tax bills. For example:
- Mortgage interest deductions in some states
- Exemptions for Social Security or pension income
- Deductions for medical expenses or property taxes paid
- Tax credits for tuition, energy efficiency improvements, etc.
These can provide substantial tax relief, especially for retirees or homeowners in states that allow favorable exemptions.
Taxation of Retirement Income
Most states exempt Social Security and defined benefit pensions from state income tax. But how retirement account withdrawals get taxed can vary widely. For example:
- California and Mississippi tax 401(k)/IRA withdrawals fully.
- Pennsylvania, Arizona, and Maine fully exempt these withdrawals.
- States like Iowa, Kentucky, and Minnesota tax only a portion.
This is an important consideration for retirees choosing a tax-friendly state to settle in.
Choosing a Tax-Friendly Retirement State
For retirees trying to stretch a fixed income, minimizing state taxes can be an important criteria when choosing where to live. Ideal states to consider include:
- Alaska – no income tax and low overall tax burden
- Nevada – no income tax plus entertainment, dining and recreation options with Las Vegas
- South Dakota – no income tax, low sales tax, low property taxes
- Wyoming – no income tax and taxes favorable to retirees
- Texas – no income tax and relatively low property taxes in many areas
- Washington – no income tax but medium-high property and sales taxes
- Florida – no income tax but average-high sales and property taxes
Besides taxes, important factors are cost of living, climate preference, proximity to family, quality healthcare, and lifestyle amenities. Finding the optimal balance can ensure an affordable and fulfilling retirement.
Conclusion
When evaluating a state’s tax climate, there are many variables to consider including income, sales, and property tax rates. For low to medium earners, sales and property taxes often constitute a bigger burden. For wealthier earners, high income tax states impose the most taxes overall. Retirees need to pay special attention to how retirement income gets taxed in each state. For the lowest overall state tax exposure, it’s hard to beat states lacking an income tax like Alaska, Nevada, South Dakota, Texas, Washington, Wyoming and Florida.
