For individuals living in high tax states such as California, New York, or Connecticut; states with no income tax may seem like a mythical beast. Could such a wonderful land actually exist? They do, and there are plenty of them. However, before you decide to pick up and move to one of these bastions of economic freedom, there are a few things to consider.
States With No Income Tax
There are currently seven US states where there is no state income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Residents of New Hampshire and Tennessee also have no income tax although they do pay taxes on dividends and investments.
At first glance, states with no income tax would seem to be a great place to live. However, when we look more closely, the economic gains might not be all they’re cracked up to be.
They Get You In Other Ways
It isn’t as though states with no income tax just don’t spend any money. In fact, according to the Tax Policy Center, Alaska spends the most money on a per capita basis. Per capita, Alaska spends nearly $20,000 per citizen; almost twice that of California.
Where does this money come from? Mostly taxes. Just not state income taxes. Tennessee, for example, has the highest sales tax in the country at 7% compared to New York State’s 4%. Tennessee’s tax on beer is also the highest in the country.
In New Hampshire, property taxes are through the roof. Washington State is home to some of the highest gas taxes in the country and there are attempts to raise it even further. Texas, Florida, and other states likewise rely on higher than average sales tax. Texas also has higher property taxes.
Does It Even Out?
It depends what you mean by “even out.” There are no significant differences in job growth among states with no income tax compared to states that do. Texas is an outlier in that regard, and has led the way in terms of job creation in recent years. However, there is no significant difference between the remaining no income tax states.
One effect that income tax does have an apparent effect on is that they benefit poorer residents. Sales tax treats everyone equally regardless of the income level of the earner. A resident who earns $1 million will pay the same tax on a loaf of bred as a resident who earns $20,000.
On the other hand, income tax varies. That $1 million earner is paying a higher amount of their earnings in state income tax than the $20,000 earner even though the loaf of bread costs the same. These taxes often go to benefit programs for lower income residents.
As a result, states that do have income tax do not need to institute higher sales, property, or gasoline taxes. These everyday and often unavoidable expenses tend to disproportionately impact lower income residents.
Should I Move?
Of course, the effect is relative. States with no income tax have always been a haven for high-income earners. This is why you often hear about athletes establishing residence in Florida regardless of the team they play for.
That $1 million earner would likely rather pay 1 or 2% more in tax for a loaf of bread than a 13.9% state income tax in California. That’s $139,000 in state taxes. That’s a lot of bread.
The best way to know if moving to a state with no income tax is to know what to expect before you go! That’s where City vs City can help. Our app calculates the true cost of living in your city and compares it with another city of your choosing.
We examine after-tax income, housing costs, transportation, and more. And yes, we account for all major state and local taxes; or lack thereof. Sorry, we can’t calculate the cost of a loaf of bread, but we CAN tell you if moving to a state with no income tax is the right move for you.