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Where the 7 States With No Income Tax Get Their Money

For most Americans, the prospect of living in states with no income tax is an attractive one. On top of growing federal tax bills, paying thousands more in state income tax is a significant drain on taxpayers' finances.

Residents of seven U.S. states are fortunate enough not to have to pay state income tax. But the obvious question is whether those residents must make up the difference through other types of taxes. Let's look at these seven states and where they get the revenue needed to provide the services their residents demand, according to the latest figures from the Census Bureau.

1. Alaska

Alaska Pipeline. Image source: Wikimedia Commons.

Alaska is the only state on the list that imposes neither a state income tax nor a state-level sales tax. What Alaska does have, though, is a wealth of natural resources. Oil-related taxes bring in nearly all of the state's revenue. These resources are also sufficient to provide residents with regular payments from the Alaska Permanent Fund, which is funded from mineral royalty payments to the state. The 2013 payment will give more than 600,000 eligible residents of the state $900 each.

2. Florida

Florida doesn't have the mineral wealth that Alaska and several other states on this list possess, but the Sunshine State does have a huge population with disposable income. As a result, Florida gets the majority of its revenue from sales and gross-receipts taxes, with a state sales tax rate of 6% and local add-ons that bring the rate higher in most areas. Although Florida has a sizable amount of valuable real estate, its property tax rates are relatively low, which combines with what many see as favorable weather to make the state a popular retirement destination.

3. Nevada

Photo source: Jon Sullivan via Wikimedia Commons.

Like Florida, Nevada also relies on sales and gross receipts taxes for much of its revenue, with the state's sales tax rate weighing in at 6.85%. The state's famous casino industry is also a source of taxes for Nevada, but to help support that industry, Nevada's tax rates on gross gaming profits are the lowest in the country. When you consider the degree to which casinos are responsible for drawing in visitors who pay sales taxes, hotel taxes, and other revenue generators, Nevada taxpayers are highly dependent on gaming's success in order to keep their own tax rates low.

4. South Dakota

South Dakota gets most of its tax revenue from sales and gross receipts taxes, with a 4% state sales tax applied to purchases. A 3% excise tax on motor vehicles also bring in a sizable amount of the state's taxes. South Dakota has also made efforts to use its favorable laws to entice businesses into the state; most notably, laws that lifted caps on interest rates led to an influx of credit card business into South Dakota in the past.

5. Texas

With the nation's second-largest population, Texas uses a combination of revenue from its oil and gas resources and sales taxes to bring in ample revenue for the state's budget. Texas charges a 6.25% sales tax, on top of which localities can add as much as 2 percentage points. At the same time, though, Texas has been reluctant to impose too many taxes on the energy industry, with many lawmakers arguing that tax cuts are better to help encourage drilling and keep high-paying energy jobs coming into the state.

6. Washington

Source: Flickr user Anupap_ts.

Washington doesn't have energy resources, but it does have a substantial population, and its 6.5% state tax rate can climb more than 3 additional percentage points in some areas. Sales and gross receipts taxes make up the bulk of Washington's budget revenue, with the state's business and occupation tax bringing in money from the corporate side of the taxpayer rolls.

7. Wyoming

Wyoming has the smallest population in the nation, but it has a combination of mineral resources and tourism, including Yellowstone National Park and the Jackson Hole resort area in the Tetons. The sales tax is modest at 4%, and the state won top billing in the Tax Foundation's 2013 list of friendliest states overall for taxation. Severance taxes for coal, oil, and gas production bring in more revenue than any other source.

What you should know

Most states with no income tax score well in terms of overall tax burdens, with their lack of an income tax reflecting in part their philosophy on how much to spend on government services. Nevertheless, before you decide to move to one of these states based solely on their income tax, make sure you know in detail what other taxes you might end up paying.

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Read/Post Comments (7) | Recommend This Article (7)

Comments from our Foolish Readers

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 August 20, 2014, at 12:17 PM, hacker44240 wrote:

    There are actually 8 states. You forgot New Hampshire.

  • Report this Comment On August 20, 2014, at 12:22 PM, TMFGalagan wrote:

    @hacker44240 - New Hampshire doesn't tax wage and salary income, but it does tax interest and dividends.

    http://www.revenue.nh.gov/faq/interest-dividend.htm

    So it typically gets left off lists like this even though many of its residents pay no income tax.

    best,

    dan (TMF Galagan)

  • Report this Comment On August 20, 2014, at 12:25 PM, rogue1teacher wrote:

    Tennessee does not have a state income tax.

  • Report this Comment On August 20, 2014, at 12:29 PM, TMFGalagan wrote:

    @rogue1teacher -

    Tennessee is in the same boat as New Hampshire, with a 6% tax on interest and dividends.

    http://www.state.tn.us/revenue/tntaxes/indinc.shtml

    best,

    dan (TMF Galagan)

  • Report this Comment On August 20, 2014, at 2:29 PM, RMengineer wrote:

    So what's California's problem? All these states seem to do just fine with out taxing _everything_ into oblivion and the things that are taxed seem to be at reasonable rates. And rational posited for many of those sates is the tax base they can draw from. How is California's tax base not even more so than those states and yet California taxes darn near everything on which a tax can be levied and a higher rates than these states that don't tax everything.

    That just seems seriously broken to me that California taxes everything at outrageous rates and with a massively wealthy tax base yet these other states seem to do just fine with taxing far fewer things at far lower rates. And what's more, even with such onerous taxation California _still_ can't seem manage a balanced budget.

  • Report this Comment On August 20, 2014, at 3:57 PM, NovellaGratuitis wrote:

    I have lived and worked in Tennessee for a number of years. We were drawn here expressly for the lack of a state income tax. The trade off is a larger than average sales tax of 8.25% on food and 9.25% on all other items. This system works for us and we do not go without any necessary services due to a shortage of funding.

  • Report this Comment On August 21, 2014, at 9:45 AM, rschwartz wrote:

    No mention of property taxes for Texas?

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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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