The premise seems brilliant enough on the surface -- avoid state taxes to keep more of your hard-earned income. Moving to one of the nine states that don't impose income taxes on any of its residents solves the problem.
The actual matter's far from this simple, however. The cost of living is at least a little different (if not a lot different) in each and every state. It's conceivable that you could end up enjoying less disposable income by living in a no-tax state.
Let's put the premise to the test for each end every state in question.
No-income-tax states
First things first. Which states don't charge any personal income tax (which doesn't impact your federal income taxes, by the way)?
There are nine of them:
- Alaska
- Florida
- Nevada
- New Hampshire
- South Dakota
- Tennessee
- Texas
- Washington
- Wyoming
These states are able to generate enough revenue through other means, like taxes on business income or sales taxes. Also note that in New Hampshire, Tennessee, and Washington, there may be some taxation of certain investment income, although at relatively modest rates.
For what it's worth, there are also four more states that have no income tax on most retirement income. Although this doesn't do anyone in their working years any good, if you're willing and able to move after you retire, these states might make it worth the trouble:
- Illinois
- Iowa
- Mississippi
- Pennsylvania
Just bear in mind that these four states' retirement income taxation rules can vary and may require a bit of verification of your taxability status. You'll want to visit each state's tax collection website for specifics.
Comparing and contrasting
This is great, but does living in any of these states actually save you money?
The cost of living in any state will still vary depending on where you live within that locale. Even then, a comparatively expensive state may still be cheaper -- on a net basis -- than living in a state that does charge income tax. It all depends on several other factors.
There's information that helps put each state's cost of living in ranked perspective.
Image source: Getty Images.
Take U.S. News and World Report's most recent cost-of-living comparison ranking for all 50 U.S. states as an example. Based on the Bureau of Economic Analysis' data regarding price levels for goods and services in each locale, the media outfit rated Arkansas as the most affordable place to live, while California was the most expensive overall.
What about the nine states without state-based income tax? Each of these states' affordability rankings (with 1 being the most affordable and 50 being least affordable) are indicated below.
| Cost of Living | State |
|---|---|
| 3 | South Dakota |
| 15 | Wyoming |
| 20 | Tennessee |
| 28 | Nevada |
| 30 | Texas |
| 39 | Alaska |
| 40 | Florida |
| 44 | New Hampshire |
| 47 | Washington |
Data source: Bureau of Economic Analysis data compiled and ranked by U.S. News & World Report. Chart by author.
South Dakota's low living costs were very impressive, and four of these states offer respectable affordability. Another four of these states, however, have a relatively high cost of living.
As for the four states that are tax-friendly to retirees, two scored really well in terms of a low cost of living, while two others were just OK.
| Cost of Living Ranking | State |
|---|---|
| 2 | Mississippi |
| 7 | Iowa |
| 31 | Pennsylvania |
| 33 | Illinois |
Data source: Bureau of Economic Analysis data compiled and ranked by U.S. News & World Report. Chart by author.
These rankings tell only part of the story. They don't illustrate exactly how much more or less expensive it is to live in these locales, compared to another. That's what the next list does.
Based on nationwide data supplied by the Missouri Economic Research and Information Center, compared to baseline index of 100, here's the cost-of-living index score for each of the 13 states in question, from most to least expensive.
| Cost-of-Living Index Score | State |
|---|---|
| 124.9 | Alaska |
| 114.1 | Washington |
| 111.4 | New Hampshire |
| 102.2 | Florida |
| 100.2 | Nevada |
| 97.2 | Pennsylvania |
| 94.7 | Illinois |
| 93.7 | Wyoming |
| 92.1 | Texas |
| 91.9 | South Dakota |
| 90.3 | Tennessee |
| 89.7 | Iowa |
| 87.3 | Mississippi |
Data source: Missouri Economic Research and Information Center. Chart by author.
In most cases, these states' tax-free income seems "worth it," and in some cases, it's well worth it. In expensive states like Alaska, Washington, and New Hampshire, though, it's possible all of your tax savings -- maybe several hundred to a few thousand bucks per year for the average household -- could be more than chewed up in other ways.
Mostly worth it -- if you can make it work
This is only a broad overview, of course. It's possible you could find a small pocket of affordability in an otherwise expensive state, just as you could end up living somewhere expensive in an otherwise cheap state. Then again, you could do the same in a state that does charge income taxes. To truly know if the math makes sense, you'll want to pick a specific geographical spot and then do a bit of comparative number crunching for that place.
Generally speaking, though, most of the states without income tax (and the few that don't tax retirement income) also offer the reasonable affordability that most people are seeking. The key, of course, is being able to remain gainfully employed at the same rate of pay somewhere else.
