Ditching income tax sounds like a dream for many Americans, and the nine states offering that see their fair share of interest.
Although you may initially keep more of your paycheck, the story doesn’t end there. These states often make up for lost revenue by increasing other costs, which are climbing fast.
Some states without an income tax have higher housing costs, utilities, or other expenses. Property taxes may be substantial, especially in areas with high housing costs, and sales taxes can add up quickly on everyday purchases like groceries.
While the lack of income tax might seem like a win, it’s important to consider the overall financial picture before moving to a no-income-tax state. The states with no income taxes are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
Realtor.com data shows nationwide listing prices rose, on average, 46.6% between May 2019 and May 2024. Two-thirds of no-income-tax states saw home prices skyrocket even higher over the past five years. Wyoming takes the crown with an 82% increase, followed by New Hampshire, South Dakota, and Tennessee with jumps of 76.5%, 65%, and 52.7%, respectively.
Even states with slower price growth like Texas, Washington, and Florida (between 26% and 36%) might leave you feeling nickeled and dimed by other costs. Home insurance costs soared in Texas and Florida because of the risk of property damage from climate-related events.
“The emigration away from high-tax states like California, Illinois, and New York and into no-tax states is driving up property values due to increased demand for housing,” said Miles Romney, assistant professor in the Department of Accounting at Florida State University’s College of Business. “But the supply is relatively constrained.”
How Low-Tax States Stack Up
| State | State Sales Tax | Property Tax Effective Rate | Average Property Tax | Average Annual Home Insurance | Worth Noting |
|---|---|---|---|---|---|
| Alaska | 0% | 0.95% | $3,947 | $1,116 | Local sales tax can be as high as 7.5% |
| Florida | 6% | 0.76% | $4,476 | $10,996 | Costliest home insurance |
| Nevada | 6.85% | 0.48% | $2,660 | $1,224 | Gambling provides significant revenue |
| New Hampshire | 0% | 1.25% | $7,172 | $1,225 | State collects tax on dividends and interest |
| South Dakota | 4.5% | 1.01% | $3,408 | $2,562 | State collects sales tax on purchases that are often exempt elsewhere |
| Tennessee | 7% | 0.44% | $1,695 | $2,470 | State collects sales tax on purchases that are often exempt elsewhere |
| Texas | 6.25% | 1.2% | $4,464 | $4,456 | Oil industry provides significant revenue |
| Washington | 6.5% | 0.8% | $5,640 | $1,437 | State charges 7% on capital gains over $250,000 |
| Wyoming | 4% | 0.53% | $2,930 | $2,159 | State charges sales tax on some personal care items like feminine hygiene and diapers |
| National | 4%-7% | 1.1% | $2,690 | $2,377 |
“States with no income taxes may not be as affordable [as] one would think for a couple of different reasons,” Realtor.com Senior Economist Ralph McLaughlin said. “First, wealthy households may seek to establish residency in such states in order to avoid paying income tax. This would mean the state would have a wealthier population base, and a wealthier base tends to be correlated with higher home prices. Second, states that have no income tax will need to make up for lost revenue in other ways, which may be from a combination of higher property and sales taxes.”
Hidden Costs and Considerations
Living in a no-income-tax state might initially seem financially beneficial, but it’s essential to look beyond the surface. For instance, Florida, despite its lack of state income tax, has one of the highest home insurance costs in the country due to the frequent occurrence of natural disasters like hurricanes. Similarly, Texas residents might enjoy no state income tax, but they face higher property taxes and rising home insurance costs due to climate risks.
In Alaska, while there’s no state income tax, residents often deal with a high cost of living due to the state’s remote location, which drives up the prices of goods and services. New Hampshire, which also lacks a state income tax, compensates with high property taxes and a tax on dividends and interest.
Nevada, on the other hand, relies heavily on revenue from its robust gambling industry, which helps offset the lack of state income tax. However, residents still face significant property taxes and relatively high sales taxes. South Dakota and Tennessee also levy sales taxes on items that are often exempt in other states, adding to the overall cost of living.
Real Estate Market Dynamics
The migration trend towards no-income-tax states has significantly impacted their real estate markets. High demand coupled with limited housing supply has led to skyrocketing property values. For example, Wyoming has seen an 82% increase in home prices over the past five years, the highest among the no-income-tax states. This surge can make it challenging for new residents to find affordable housing.
Even states with more moderate price growth, such as Texas and Washington, are not immune to the pressures of a competitive real estate market. The influx of new residents has driven up demand, further straining the already limited housing supply and pushing home prices upward.
Conclusion
While the allure of living in a state with no income tax is strong, it’s crucial to consider the broader financial implications. Higher costs in other areas, such as property taxes, home insurance, and everyday expenses, can offset the savings from not paying state income tax. Potential residents should thoroughly research and weigh all factors before making a move to one of these states.
Understanding the hidden costs and overall financial landscape can help individuals make more informed decisions and avoid the potential pitfalls of relocating to a no-income-tax state. The dream of tax-free living might not always align with the reality of the financial trade-offs involved.
