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The 5 States With No Sales Tax

All 50 states make different choices about where they're going to get the tax revenue they need in order to provide the services their residents expect and demand. With income taxes, property taxes, and sales taxes among the revenue-collecting tools at their disposal, most states end up using a combination of all three to make ends meet.

But some states have chosen not to impose any sales tax at the state level, making it a lot cheaper for shoppers to buy. Using a combination of figures from the Tax Foundation, including general state sales taxes and average local-option surtaxes, let's look at the five states that don't have statewide sales taxes with an eye toward identifying the impact their decision has on individuals and businesses.

5. Alaska
Although Alaska doesn't have a statewide tax, it does have local option taxes that amount to an average rate of 1.69%. Alaska doesn't have an income tax, either, relying solely on property taxes for its sole means of support from individuals. The lion's share of state revenue, however, comes from royalties and oil tax revenue from ExxonMobil (NYSE: XOM  ) , ConocoPhillips (NYSE: COP  ) , and BP (NYSE: BP  ) , all of which have extensive operations in the state. Even recent tax cuts on those oil giants hasn't added to residents' share of the overall tax burden, and residents also receive checks from the Alaska Permanent Fund amounting to $878 per person in 2012.

4. Montana
Like Alaska, Montana also has local-option resort taxes in certain areas of the state, but the Tax Foundation lacked adequate data to measure the average impact of those add-on taxes. Yet many of the most populous areas of the state, including Billings, Bozeman, and Missoula, don't have any sales taxes at all. Given that state's remote location, however, having no sales tax doesn't do much to draw shoppers from neighboring states. Fairly high income taxes offset the lack of sales tax.

3. New Hampshire
With the moniker "Live Free or Die," New Hampshire gives residents a double-tax break, with no sales tax and an income tax that applies only to interest and dividend income. High property taxes make up the difference, but New Hampshire's proximity to Boston leads to a regular exodus of shoppers across the Massachusetts border to avoid that state's 6.25% sales tax.

2. Delaware
Delaware is a small state, but it plays a vital role in providing a home for most of the nation's largest corporations. The state's 8.7% flat corporate income tax rate leads to tax collections that are the seventh highest in the country and help allow Delaware to charge no sales tax. Nearby Philadelphia and Baltimore provide two sources of shoppers seeking tax-free purchases, but shopping malls strategically located on the Interstate 95 corridor do their best to pull in travelers from all over the East Coast.

1. Oregon
Of all the sales-tax-free states, Oregon has the closest symbiotic relationship with its neighbor. Washington lies just across the Columbia River from Portland, and the states are near-mirror-images of each other when it comes to taxation, with Washington having a high sales tax but no income tax, while Oregon has a high income tax but no sales tax. As a result, those living in Vancouver, Wash., across the river from Portland, can structure their lives to pay relatively little in income or sales taxes, taking advantage of their proximity to Oregon shopping.

A better way to tax?
Many tax advocates believe that sales taxes are the worst way to tax residents, as their consumption focus tends to hit the poor the hardest. By that measure, these five states are most forward-thinking in their tax strategies, although they also clearly believe that they can attract some economic activity by luring shoppers in with tax-free purchase opportunities.

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Read/Post Comments (13) | Recommend This Article (5)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 05, 2013, at 11:01 AM, GT6 wrote:

    Delaware also takes advantage of the Cape May Lewes Ferry to draw residents and tourists from the Jersey shore to outlet centers near Rehoboth. Not only do they avoid a regressive tax, they increase revenue and jobs as a result but only because they are a small state surrounded by large one and because they are unique in the area.

  • Report this Comment On May 05, 2013, at 11:06 AM, Baldurdash wrote:

    Washington state robs me blind in taxes. Sales, gas, alcohol, etc. A $10 bottle of alcohol has and extra $6.60 in tax. Renewing my car tabs online was 10% of what I paid for my car. I'm thinking of moving because of it.

  • Report this Comment On May 05, 2013, at 11:10 AM, room28 wrote:

    In New Hampshire the sales tax is aimed at tourist. As a tourist I paid 46% on my last car rental there. I also paid 10% on all eat out food. Plus you pay a hotel tax until you become a resident at 6 months. They live on out of state money. Not to mention the toll to drive the short 16 miles along the coast. Also the only place I know that you can stop at a rest area and buy booze. Crazy wacked out place. I have family that live there and Live free or Die is a joke. Why don't you tell the people just how high the property taxes are. The Truth is ugly.

  • Report this Comment On May 05, 2013, at 11:13 AM, roywill83 wrote:

    Being a socialistic state New Hampshire needs to change it's moniker. Live Free or Die doesn't suit it. It should be big government or die.

  • Report this Comment On May 05, 2013, at 11:44 AM, Stevegarry22 wrote:

    You have to laugh at the way this story was laid out. The last paragraph (A better way to tax) is insane. A sales tax is not only a better way to tax, but it tax's everyone equally. If you are poor you buy very little, if you are wealthy you buy more, and more expensive items, hence the wealthy would pay more tax's than the poor.

    If you are poor you might buy a Timax watch for $8.95 at Walmart, if you are wealthy you might buy a Rolex watch for $35K at a high end store, hence the Rolex buyer obviously pays more in tax's.

  • Report this Comment On May 05, 2013, at 12:11 PM, TommeA wrote:

    This FOOLISH story goes along with the other motley one a week or so back in which it labelled states that have no income tax as being discriminatory against the poor. Sales taxes in states such as Texas impact the poor very little because food, medicine and health care are not taxed. As one writer above wrote, people with more money who buy more things pay higher taxes. Why not write an article that points out the states that discriminate against the middle class (who are the true workers in America) the most? Those states would be the ones with the highest income taxes and to a less degree sales taxes. The poor pay little or no taxes period. The rich have tax shelters and accountants. The sales tax is the fairest for all, but fuzzy headed tax advocates never get that. This article is propaganda.

  • Report this Comment On May 05, 2013, at 1:01 PM, wskadavis wrote:

    Sales tax in California is 8% and people hat e paying tax so much that if a store has a sales tax holiday people will rush there to buy the items tax free -- However if the same store ran a 15% off sale nobody would go.

  • Report this Comment On May 05, 2013, at 2:58 PM, TMFMTHead wrote:

    As a native Montanan, I am proud that our state has no sales tax. When the constitution was re-written in the '70s, the citizens were uncommonly smart. Written into the constitution is a mandate that if a sales tax were ever put in place, it would be capped at 4%.

    Personally I would rather see a sales tax than an income tax. The worst system though is when you have income, sales and property taxes.

    Taxing consumption promotes savings. Put in place a national sales tax, and eliminate the income tax. Provisions can be put in place to help those who earn at the low end. You also capture most of the underground economy that currently is completely missed.

  • Report this Comment On May 05, 2013, at 4:26 PM, Acttorneyatliar wrote:

    All I know is that in California, we are taxed plenty of all fronts, and yet, here in L.A. and throughout L.A. County, the roads are largely awful, potholed, tire-flattening things. You know you have crossed into neighboring Orange County because suddenly the freeways are wider, smoother by far, and landscaped quite nicely. It's not so much what we are taxed that bothers me - well, it is, but - as what the politicians elected to distribute our tax dollars are doing, or not doing with it.

  • Report this Comment On May 05, 2013, at 5:46 PM, OregonCoast1960 wrote:

    I was born and raised in California and moved to Oregon. Later I spent a year in Washington. Biggest thing I noticed in California and Washington state was the amazing school systems and lots of police protection. In Oregon we were promised that lottery dollars would help us with schools and roads. Lottery dollars help schools closest to Salem our capitol, Portland and then Eugene. Its what we call the 'filtering' effect. With the lack of a sales tax and depending on lottery dollars for schools we have had a lot of schools 'consolidated' in less populated areas. My son is a sophomore and starting this year they have moved all the 8th graders into the high school. This money 'filters' down to smaller areas and everyone suffers. I also lived in Delaware for three years and the only benefit there without a sales tax is that all the states around Delaware take advantage by buying and licensing cars and homes there. Their school system isn't the greatest either. I'm not a teacher, just a concerned parent...

  • Report this Comment On May 05, 2013, at 9:50 PM, savage393 wrote:

    In Oregon, we have been asked to vote in a sales tax many times, but it never passes. The biggest problem is that the state want to add a sales ta, but does not offer any tax relief in other areas. All new statewide taxes have to be approved by the voters, so unless something changes, Oregon will continue to have no sales tax.

  • Report this Comment On May 06, 2013, at 3:38 PM, famiglia112 wrote:

    I have to agree with TMFMTHead's last paragraph. The overall incentive structure of a sales tax is certainly better, as it encourages savings. The only argument I ever hear against sales taxes is that they are regressive, which is not strictly true. A flat sales tax on all purchases is regressive, but many have exemptions for necessities. Another version of the sales tax is the FairTax, which is actually progressive, due to its prebate. I find a progressive sales tax particularly interesting, and wish the FairTax would be discussed more often in tax reform debates.

  • Report this Comment On June 08, 2013, at 6:34 PM, roadhouse78 wrote:

    NH has property tax relief for low income families they essentially fill out a form with the state and get some relief. I'm a NH resident and although I benefit greatly from no state sales or income tax the state does have a statewide property tax and a business tax. I personally love the idea of the fairtax, the IRS cost 450 Billion yearly to operate that's almost 1/3 of all income taxes collected, with a sales tax you would go from 165 Million tax returns to 25 Million tax returns, the rate would be flat. NH residents don't like being taxed but personally I think if the state presented the idea of the FairTax correctly people would go for. You eliminate the statewide property tax, meals taxes, gas and utility taxes, business tax with a flat sales tax. Instead of having the prebate you keep the system for property tax relief. You then provide enough built in relief to keep the returns from the state to a minimum. In other words look at the average home value and average household size and provide relief on say the first $100,000 your house is valued. In other words if my house is valued at $200,000 and my property taxes $4,000 to the town and the average household prebate is $1,000 the town would collect $3,000 in taxes and the state would pay the rebate to the state to reduce the number of checks. If a single person or a small family is living in a super large house they would choose to pay higher property taxes by living in house thats larger than the basic needs of an individual or family.

    If on the other hand one lives in an $80,000 house and doesnt receive the full prebate or if the house hold size is say 6 and above the average they could file for property tax relief through the state. This would reduce the prebates per holdhold to a much smaller percentage that would be more efficient and cheaper to run.

    For renters you put in a clause that states any renter with a lease in place at the time of passage would receive the discount the landlord receives in property tax built into their monthly rent. Moving forward it would take care of itself when renters start losing residents to those offering lower prices of rent.

    Looking at the states website and revenue as a percentage of GPS if you remove tolls, cigarette and liquor taxes from the remaining revenues accounts for about 2.5% of the NH GDP. If you make the tax 3% to cover the prebate it would still be cheaper than the sales tax in Mass, VT and Maine and the hotel and restaurant tax would be reduced from 10% to 3%.

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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