Do you hate paying sales tax every time you buy something? Well, five U.S. states have no sales tax on purchases, as of 2017. The obvious benefit to living in a sales-tax-free state is that you'll pay less money out-of-pocket for each purchase. Plus, sales taxes are often a regressive form of taxation, disproportionately affecting lower-income households that tend to spend a greater percentage of their income than affluent households.
On the other hand, there are often drawbacks to living in states without a sales tax, since state funds need to come from somewhere. This is also the case in most U.S. states with no income taxes. As you'll see, many states without sales taxes offset this by charging higher income, estate, or property taxes. Others tax Social Security benefits or impose high excise taxes on purchases like gasoline and alcohol. However, others get their revenue from other sources and are truly tax-friendly places.
As of 2017, here are the five U.S. states that don't have a state sales tax, and a closer look at just how tax-friendly these states are.
Oregon is an example of a state that isn't very tax-friendly at all, despite not having a sales tax. Specifically, Oregon's income tax rates are on the high end, ranging from 5% to 9.9%, and the top rate is assessed on taxable income greater than $125,000 for single filers or $250,000 for joint filers. In addition, Oregon is one of the few states that has an estate tax that uses a lower exemption amount than the federal government, taxing estates valued over $1 million at rates of up to 16%.
Like Oregon, Montana makes up for its lack of a sales tax with other sources of revenue. The state's 1%-6.9% range of income tax rates may sound modest, but the top rate is applied on income above a relatively low $17,400 threshold. Plus, Montana taxes Social Security benefits, making it an especially tax-unfriendly destination for retirees.
Alaska is an extremely tax-friendly state. In addition to the absence of a state sales tax, Alaska also doesn't have an income tax, and doesn't impose a property tax on motor vehicles. Even better, Alaska residents get a cut of the state's massive oil revenue, known as the Alaska Permanent Fund dividend. For 2016, the dividend was $1,022 per person -- substantially less than in recent years, but still a nice perk of living in a state that is already a tax haven. And given the state's oil wealth, it should come as no surprise that Alaska has the lowest gas tax rate in the nation.
All that being said, don't be surprised if you have to pay some tax when making purchases in Alaska. Local governments in the state can assess sales taxes on purchases, but the statewide average is still a rather low 1.76%.
4. New Hampshire
In addition to having no sales tax, New Hampshire only assesses an income tax on dividend and interest income at a 5% rate, not on wage income. However, New Hampshire is far from being a tax shelter. The state assesses relatively high tax rates on gasoline, tobacco, and alcohol, and also has some of the highest property tax rates in the U.S. Recent data shows that the average real estate tax rate is 2.15% ($2,150 per $100,000 of home value), and the vehicle tax rate averages 1.8%.
When I was a child growing up in Southern New Jersey, I remember frequently taking day trips with my family to Delaware to take advantage of the tax-free shopping available in the state. In addition to having no sales tax, Delaware is a generally tax-friendly place, with relatively low income tax rates (2.2%-6.6%), no vehicle taxes, and one of the lowest real estate tax rates in the U.S.
So where does Delaware's revenue come from? In addition to the modest income tax revenue, Delaware's other major revenue source is corporate franchise taxes. In fact, business-friendly Delaware is the legal home to the majority of Fortune 500 companies, which is a major revenue generator for the state.