Why States With No Income Tax Will Keep on Growing

Most of the financial advice you'll find about taxes focuses on the IRS and saving money on your federal tax return. But increasingly, state-level taxes have become more important, and states with no income tax have a big competitive advantage over their taxing counterparts. When you look at migration patterns, you can clearly see the impact that state income taxes have on which states have grown the fastest.

Where to go to pay no income tax
Currently, seven states -- Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming -- impose no income tax whatsoever on their citizens. Two other states, Tennessee and New Hampshire, have no tax on wages or business income, reserving taxes only for investment income from dividends and interest.

As it happens, most of those states had above-average population growth between 2000 and 2010. Nevada grew by the largest percentage of any state, while Texas had the biggest raw population gain over the decade. Only New Hampshire and South Dakota lagged behind the average gain, and even New Hampshire managed to outpace the rest of the lagging New England states by a wide margin.

Taxes of all kinds
Of course, income tax is just one way that states can get at income. Between sales and property taxes, state and local governments can end up collecting enough in additional revenue to offset low income taxes.

Yet historically, this hasn't been the case. According to the most recent figures available from the Tax Foundation, seven of the nine states listed above make up the seven least-taxed states in the country. Only Florida and Washington rise into the middle of the group.

Moreover, many tax-free states have the benefit of business trends supporting their growth. Texas is well-known for its energy riches, and in recent years, new unconventional production methods in areas like the Eagle Ford have been gold mines for EOG Resources (NYSE: EOG  ) and Chesapeake Energy (NYSE: CHK  ) . Yet Wyoming has its energy-rich Powder River Basin, where EOG and Peabody Energy (NYSE: BTU  ) have plenty of resources to extract. Alaska's famous oil pipeline continues to carry crude for BP Prudhoe Bay (NYSE: BPT  ) shareholders.

Beyond energy, the influx of population in many states has itself created business opportunities. Nevada has capitalized on the exodus of overtaxed former California residents to go beyond its traditional status as a gaming mecca and build a more diversified economy. Washington and Texas have also attracted technological development away from California, with Dell (Nasdaq: DELL  ) and Microsoft merely representing some of the earliest of many companies that prospered outside Silicon Valley.

The trend has gotten so strong that migration patterns are almost expected. Especially in the East, it's not uncommon in the slightest for people to move south when they retire, and Florida is a favorite destination. The warm weather is a convenient excuse for many, but the flight from high-tax jurisdictions is a significant drain on state tax coffers and presents an ongoing problem. Some states have taken steps to collect taxes on income that would ordinarily qualify for deferral on federal tax returns, merely to ensure that those states get their cut at some point.

Simple economics prevails
Obviously, taxes aren't the only consideration for people deciding where they want to live. If you don't have a way to support yourself or if costs of living are too high, then tax savings aren't worth very much. Moreover, family considerations will always play a role in choosing where to live.

All other things being equal, though, people will gravitate to states with no income tax. If that trend continues, then high-tax states could find themselves facing significant difficulty in attracting the people they need in order to promote growth.

Microsoft put Washington's tech industry on the map, but the company has failed to capitalize on the incredible growth in mobile over the past decade. However, with the release of its own tablet, along with the widely anticipated Windows 8 operating system, the company is looking to make a splash in this booming market. Find out whether Microsoft is a buy in our latest premium report on the tech giant, in which our analyst explains that while the opportunity is huge, the challenges are many. He's also providing regular updates as key events occur, so make sure to claim a copy of this report now by clicking here.

Fool contributor Dan Caplinger has no positions in the stocks mentioned above. You can follow him on Twitter @DanCaplinger. The Motley Fool has options positions on Chesapeake Energy. Motley Fool newsletter services recommend Dell. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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