States With No Income Tax: Everything You Need To Know

Taxes are an unavoidable part of life – something like federal income tax, for example, is paid by everyone across the U.S. And most states also charge a state income tax. The average American pays about 8.9% in state income tax on top of the federal income tax, with residents of California paying the highest at 13.3%.

But for some states, the state income tax is 0%. So, how are these states able to operate without a state income tax while others are not? After all, every state operates on a budget that allocates funds to essential services, schools, parks, roads and more.

Those funds have to come from somewhere. States with zero income tax find revenue from other sources, including different types of taxes and, in some cases, by tapping their own abundant natural resources for revenue.

9 States Without Income Tax

As of late 2023, nine states had no income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. However, Washington does levy a capital gains tax on high-income earners, and New Hampshire will tax dividend and interest income until the 2025 tax year.

So how do these states fund their government? And are they really less expensive places to live than states that charge a state income tax?

The answer is that each state is different, but they all offset their lack of income tax with revenue from other types of taxes, such as sales and property taxes.

Let’s examine some of these other taxes and revenue sources and how all of the nine states without income tax use them to fund their government.

How Do States Without Income Tax Make Money?

States that do not charge an income tax on residents raise money typically use several other types of taxes to cover public projects. It should be noted that all states that do charge a state income tax also rely on most or all of these types of taxes, usually to a lesser degree.

Dividend and Interest Income Tax: Different from a payroll income tax, these taxes are on a percentage of income from investments.

Property tax: Set by local and county governments, property taxes on homeowners and other owners of real estate fund schools, fire and police protection, roads and more. Property taxes vary by community and are paid directly to the local government. While renters do not pay property tax, their landlords do and the cost of the tax is usually figured into the rent paid by tenants.

Sales tax: This tax is added onto the sale of countless transactions, from minor retail purchases to the sale of a new car. The average state charges about 5% sales tax, with California the highest at 7.25% and five states having no sales tax.

Excise tax: An excise tax is any duty on manufactured goods that is levied at the moment of manufacture rather than at sale. Excise taxes can be and are made by federal, state and local governments and are not uniform throughout the United States. Certain goods, such as gasoline, diesel fuel, alcohol, and tobacco products, are taxed by multiple levels of government simultaneously.

Hotel/tourism tax: Some states that are popular with tourists can raise a lot of revenue by levying taxes on hotel rooms, thus easing the tax burden of their own residents by having the state partially funded by visitors from other states and countries.

Alaska

Alaska is unique among the 50 states in that its government is largely funded by oil exports from the Trans-Alaska Pipeline. The oil and gas industry is the largest component of Alaska's economy, making up nearly 85% of the state budget.

Not only does Alaska not have an income tax, each of Alaska’s 730,000 residents gets an annual check from the Alaska Permanent Fund Distribution based on oil profits. In 2023 the dividend amount was $1,312.

Alaska also does not have a state sales tax. Some localities have a sales tax, which is capped at 7.5%. Property taxes, which are largely used to fund local government activities, are slightly higher at 1.17% than the U.S. average of 0.99%.

Florida

Already one of the largest U.S. states by population, Florida is also among the fastest-growing, as well as one of the largest tourist destinations. In fact, tourism contributes massively to Florida’s $1 trillion economy, the 4^th largest in the country. Through its vigorous sales tax and taxes on hotel rooms, Florida captures a sizable percentage of its revenue from visitors from other U.S. states and outside countries.

But the largest source of state government funding in Florida, approximately 80%, comes from the state sales tax. Florida has a 6.00% state sales tax rate, a max local sales tax rate of 2.00%, and an average combined state and local sales tax rate of 7.02%.

Nevada

Nevada has a relatively low state sales tax of 4.6%, but all of its largest urban areas also charge a local sales tax. All of Clark County, for instance, which encompasses the city of Las Vegas and is home to most Nevadans, adds on a 3.775% local sales tax. This makes a combined tax of 8.375% on the sale of all goods and services, with exceptions for food purchased in grocery stores and a few other essential items.

Since an estimated 600,000 people visit and spend a great deal of money in Las Vegas each week, a large percentage of the state budget is being paid for by people from other states and countries. Las Vegas also generates a great deal of revenue for the state through so-called “sin taxes” (excise taxes) on things like alcohol, tobacco and gambling, as well as hotel room taxes.

New Hampshire

New Hampshire heavily taxes businesses that profit in the state. The business profits tax ("BPT") was enacted in 1970 and currently charges a tax on income from conducting business activity within the state at the rate of 7.6%. In 2024 it’s expected this tax will supply 39% of state revenue.

Traditionally, New Hampshire has levied a high Interest and Dividend Tax on investment income, though that tax is set to be phased out in 2025. New Hampshire also has the fourth-highest property tax rate among all U.S. states, with an average effective rate of 1.77% and a median annual property tax payment of $6,097.

South Dakota

South Dakota is able to fund its government without charging income tax on individuals or corporations. Instead the state relies heavily on sales tax, property tax and special or excise taxes.

South Dakota has a 4.5% state sales tax rate, a maximum local sales tax of an additional 4.5% and a combined average state and local sales tax of 6.4%. South Dakota also leans heavily on property taxes. The median property tax in South Dakota is 1.17% of assessed home value, slightly higher than the national average.

Tennessee

The Volunteer State makes up for its lack of individual income tax by charging a robust corporate income tax of 6.5%, as well large state and local sales taxes, excise taxes and franchise taxes. A franchise tax is a flat fee (meaning it’s not tied to income) placed on certain corporations and businesses that have a presence in the state. In fact, 83% of Tennessee’s budget comes from the combination of sales, excise and franchise taxation.

Tennessee’s state sales tax is above the U.S. average at 7% and is topped in some localities by an additional local sales tax up to a maximum of 2.75%.

Texas

One way the state of Texas ensures residents get government services without a state income tax is by spreading the burden to local governments. This is done through higher property taxes, which are set by city and county governments to fund schools, police and fire protection and other essential services.

Overall, Texas has the 7^th highest property taxes in the U.S. on average. Property taxes in the Lone Star State average 1.6%, well above the national average of 0.99%. The average Texas homeowner pays $3,797 a year in property tax.

Texas also charges 6.25% tax on all sales in the state, slightly higher than the U.S. average. Local sales taxes established by cities, counties, special-purpose districts and transit authorities, can add up to a combined 2%, making the maximum sales tax rate anywhere in Texas 8.25%.

Washington

Unlike most states, Washington does not have either a personal or corporate net income tax. Revenue from taxes comprises almost all of the state revenues deposited in the state general fund. Washington makes a large portion of this money from a high sales tax. Washington has a 6.50% state sales rate, a max local sales tax rate of 4.1%, and an average combined state and local sales tax rate of 8.86%.

Washington is also known for elevated excise taxes. It charges nearly 50 cents per gallon of gasoline, according to the Washington State Department of Revenue, which is 3^rd highest in the U.S. Other sources of revenue include license and permit fees, the business and occupation (B&O) tax, and property tax.

Wyoming

In addition to property taxes, the state of Wyoming relies on sales taxes and windfalls from the state’s abundant natural resources industries to run its government. The state of Wyoming has a 4% sales tax that applies to each purchase made, except for some services, groceries and prescription drugs, in all 23 counties. Currently in Wyoming, 21 of the 23 counties have the 5th penny or 5% optional general purpose sales tax in place. The vast majority of this extra penny of revenue goes back to the local community government. In some communities there may also be a 6^th penny special purpose sales tax, the entirety of which funds a specific local special purpose or capital project.

As a state that is rich in natural resources, particularly coal, Wyoming’s government is the recipient of significant Federal Mining Royalties, which helps to offset the state’s lack of income tax.

Pros And Cons Of States With No State Income Tax

States With No Income Tax FAQs

Here are some of the key issues states consider when deciding whether to have an income tax.

Why do some states not have an income tax?

This has been a long-debated question and has no definitive correct answer. It’s mostly a political decision. Besides just being another way to collect revenue to run the state, many believe that a “progressive” tax like an income tax is more fair than a “flat” tax, such as a sales tax. Others believe that a sales tax stimulates more economic activity because it allows people to keep more of their paycheck.

Say, for example, that a state charges a 3% income tax on all residents. For Sally, who earns $100,000 a year, her annual state tax is $3,000. John, on the other hand, who makes $50,000 a year, would only pay $1,500.

If the same state no longer has an income tax, but instead implements a statewide 6% sales tax, things change. Say both Sally and John buy a $20,000 car. Regardless of their income, they pay the same $1,200 tax to help fund the state government.

Will moving to a state with no income tax really save me money?

At first, it might seem that living in a state with no income tax helps everyone who earns a paycheck. They get to keep more of their money and spend it how they wish, instead of letting the government decide how to spend it. But since states with no income tax often have higher sales and property taxes, this equation can even out quickly. Lower income people may in fact pay more in taxes in states with no income tax — because they pay a higher flat tax every time they buy a meal or a pair of shoes.

Which states have the lowest taxes?

According to U.S. News and World Report, Americans as a whole pay an average of 8.9% of their income in state taxes. As measured by total taxes paid divided by total personal income, these states ranked as having the lowest taxes on an individual:

• Alaska: 5.4%
• Tennessee: 6.3%
• New Hampshire 6.4%
• Wyoming: 6.6%
• Florida: 6.7%

Which states don’t have a federal income tax?

Residents of all 50 U.S. states and the District of Columbia must pay a federal income tax in accordance with the exact same rules set forth by the IRS, with no exceptions.

An individual who has income from the U.S. Possessions/Territories of American Samoa, the Commonwealth of the Northern Mariana Islands (CNMI), Guam, Puerto Rico or the U.S. Virgin Islands will usually have to file a tax return with the tax department of one of these territories.

If you have income from one of these U.S. territories, you may have to file a U.S. tax return only, a territory tax return only, or both returns. This generally depends on whether you are considered a bona fide resident of one of the U.S. territories. In some cases, you may have to file a U.S. return, but be able to exclude income earned in a territory from U.S. tax. Consult a tax professional for assistance.

The Bottom Line: Moving To A State With No Income Tax Could Pay Off

Living in a state with no income tax can make your tax returns easier to file and let you keep more of your paycheck. But if it means paying higher sales and property taxes, the difference might be negligible. Look at the overall tax burden on an individual in that state before deciding if moving is a great idea.

No matter what state you live in, the Rocket Money℠ app can help you track your overall budget, giving you the best snapshot of your financial picture at all times.