Note: This article was originally published on Fool.com on August 21, 2015, and was last updated on Feb. 16, 2016.
There are seven states in the United States that have no income tax whatsoever, and another two that don't tax wage income. Living in one of these states may sound appealing -- after all, your paycheck is likely to be higher if you choose to work in one of these states. However, that doesn't necessarily mean you'll get to keep more of your salary. Here are the states with no income tax, and what you should know about each one before considering a move.
The seven states with no income taxes at all
As I mentioned, seven states in the U.S. have no income tax whatsoever, choosing to fund their state and local operations through other means. In alphabetical order, these states are:
- Alaska -- Not only does Alaska have no income tax, but it has no state sales tax either, choosing to pay for state expenses with its petroleum revenue. To make the deal even sweeter, Alaska residents also receive a share of the state's royalties, which amounted to $2,072 per person in 2015.
- Florida -- As a tourist-rich state, Florida brings in lots of sales tax revenue, which is enough to fund the state government. Local governments are funded through property taxes, which are above the national average.
- Nevada -- Similar to Florida, Nevada funds its state operations through sales taxes, and derives a large portion of its revenue from gambling-related taxes and fees.
- South Dakota -- The sales tax in South Dakota is just 4%, but the state has various use taxes that produce a lot of revenue.
- Texas -- State and local revenue in Texas comes from sales taxes, as well as from royalties on the state's oil and gas production.
- Washington (state) -- Voters in Washington rejected a proposal to implement a state income tax in 2010, choosing to deal with high sales taxes and one of the highest gasoline taxes in the country instead.
- Wyoming -- In addition to having no income tax, Wyoming doesn't have a corporate income tax either. Instead, state revenue primarily comes from natural-resource revenue (coal mining), as well as property taxes.
Two more states with almost no income tax
In addition to the states listed above, New Hampshire and Tennessee don't tax wage income, but do have a tax on dividends and interest income.New Hampshire collects taxes on dividend and interest income above $2,400 ($4,800 for joint filers), and offers additional exemptions for blindness, disability, and age. Tennessee collects tax on this type of income over $1,500 ($3,000 for joint filers).
So, while those who derive all of their income from their paychecks don't have to worry about state income tax, retirees and other people dependent on income from their investments do.
Is the absence of income tax always a good thing?
Proponents of not having an income tax often claim that their states are better at creating jobs, and that they can more effectively retain educated workers. However, the evidence doesn't exactly point in favor of those arguments.
For example, a 2013 report by the Institute on Taxation and Economic Policy, or ITEP, found that job growth actually lags behind population growth in eight of the nine states that don't tax wages (Texas is the lone exception). A separate report from the Center on Budget and Policy Priorities, or CBPP, found that few people actually decide what state to live in based on whether or not it has an income tax.
Additionally, the absence of an income tax is often offset by higher sales and property taxes and other state revenue sources. For example, New Hampshire has one of the highest property tax rates and the highest in-state college tuition in the country. Washington State has some of the highest sales and gasoline taxes in the nation. Tennessee has the highest overall sales tax rate in the U.S., averaging 9.45% when factoring in local taxes.
Finally, there is a solid argument to be made that the absence of income tax is unfair to the poor. Income taxes are generally higher for high-income individuals, whereas sales and other taxes tend to cost low-income individuals more as a percentage of their paychecks. In fact, five out of the six states with the most "regressive" tax structures don't have an income tax -- and Washington State is the most extreme example. Just to illustrate this point, the poorest 20% of Washington's residents pay 16.9% of their income in taxes, while the top 1% pays just 2.8%.
Just because your state (or one you're considering moving to) doesn't have an income tax doesn't necessarily mean that you'll be able to keep more of your money. Income tax is just one of the financial factors you should evaluate when deciding what state you want to call home.
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