How Do 9 States Get By With No Income Tax? – The Tri-City Record

A tax expert explains the considerations he makes

How Do Some States Get By Without an Income Tax? – Vonnie, age 12, Auburn, Alabama

Just before I was born in the 70s, my family moved from Nebraska to Texas. A big reason was that Texas was considered a low-tax state, and my father wanted to start his business there.

Texas is also one of nine states that does not levy an income tax on the “earned income” of people who work there.

That doesn’t mean Texas doesn’t tax its residents – it does. Texas has other taxes to help pay for schools, hospitals, health care, roads, airports, fire departments, business loans, public safety, and all sorts of other public services. For example, Texas has one of the highest property tax rates in the United States.

Understanding the types of taxes states can collect can be complicated. As a tax professor and policy expert, it’s my job to explain how our tax system is designed and works.

Why states get to make the rules

In general, states have the power to tax their residents. When residents choose to live in a state, they benefit from that state’s laws and protections and pay taxes as part of sharing the costs of government.

Just as the U.S. Constitution gives the U.S. government the right to impose federal taxes, each state has its own state constitution and laws that can impose taxes on a range of items. They can tax earned income from wages, money earned from investments, purchases of alcohol, fuel, tobacco, or groceries, or a number of other items, industries, and activities, such as sporting events and hotel stays. There are many different types of taxes, and each state has unique rules.

Politicians aren’t the only ones who decide how much and how much to collect in taxes. Citizens often vote on imposing, raising, or eliminating state taxes. On Election Day in November 2024, for example, voters in some states will be asked whether they want the state to raise taxes to fund social programs. In Oregon, voters will decide whether to raise taxes on businesses operating there to pay for a new anti-poverty program.

Among states that do have a personal income tax on wages, tax rates can either be the same percentage of everyone’s income or they can vary depending on how large the individual’s paycheck is. In some states, tax rates increase as a taxpayer earns more money.

No income tax does not mean tax free

The nine states that do not have a tax on earned income are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. Two of them – New Hampshire and Washington – do tax income, such as money earned from stocks and other investments, but they do not tax income earned from work.

When a state does not levy an income tax, it often levies other taxes to pay for education, roads, health care, and other public services.

In some cases, states will impose higher sales taxes or higher property taxes, such as taxes on the value of a person’s home. Or they may rely on cities and counties to collect those taxes to pay for services. Tennessee, for example, has no state income tax, but it has one of the highest combined state and local sales tax rates—9.548%—of any state.

On the other hand, Alaska is one of the lowest taxed states. It has no state income tax or state sales tax. However, Alaska does have a state property tax and can impose significant taxes on the oil and gas companies that operate there. Cities and other local jurisdictions can also impose sales taxes at the local level, and often do.

Pros and cons of no state income tax

There are both advantages and disadvantages to living in states that do not levy state income taxes.

You may save money. But that doesn’t mean you don’t pay taxes, and there are trade-offs to consider. Sometimes states without income taxes don’t have the best public services.

For example, you may want to move to a state like Texas to avoid income tax, but you should be prepared to pay more for healthcare. In general, Texas has some of the lowest government spending on healthcare or public transportation.

When states levy higher property taxes or sales taxes to raise enough money to make up for the lack of income taxes, it can also impact the overall affordability of living in a state that doesn’t have an income tax.

This is most important for lower-income earners, because state sales taxes have a greater impact on overall affordability. For example, students who attend college and work part-time may have low incomes. But if they live in a state with a high sales tax instead of an income tax, they pay the same high rate as full-time workers with much higher incomes. As a result, students may have a harder time making ends meet than full-time workers.

Also, remember that in most cases, Americans still pay taxes on their income. Even if someone is not subject to state income tax, the majority of the American population pays federal income taxes, and for many people, those federal taxes are much higher than any state income tax.

Hello, curious kids! Do you have a question you’d like an expert to answer? Ask an adult to send your question to [email protected]. Tell us your name, age, and the city you live in.

And since curiosity knows no age limit – adults, let us know what you are wondering too. We can’t answer all questions, but we’ll try our best.

This article is republished from The Conversation under a Creative Commons license.

Curious Kids is a series for children of all ages. If you have a question you would like an expert to answer, please send it to [email protected].

Copy article link