States With Low Taxes and a Low Overall Burden

When deciding to move, a state’s tax environment can directly influence your financial health. The landscape of state and local taxes is varied, and a lower tax bill in one area can be offset by higher taxes in another. The absence of one major tax, such as an income tax, does not guarantee a low overall financial obligation. This requires a deeper look into the different types of taxes that contribute to an individual’s total burden.

Understanding Total Tax Burden

A person’s total tax burden is the measure of all state and local taxes paid as a percentage of their income. This figure provides a more complete picture than focusing on a single tax, as it encompasses income, sales, and property taxes. The interplay between these components determines the ultimate financial impact on a resident. Other taxes, such as estate or inheritance taxes, can also contribute to the total burden, though only a small number of states impose them.

State Income Taxes

State income taxes are a direct tax on income earned within a calendar year. States may use a progressive system with tax brackets where rates increase with income, or a flat tax system that applies a single rate to all income levels. The source of income also affects how it is taxed. States differ in their treatment of retirement income, and some fully or partially exempt Social Security benefits, pensions, and withdrawals from accounts like 401(k)s or IRAs.

State and Local Sales Taxes

Sales taxes apply to the purchase of goods and many services. While every state with a sales tax sets a statewide rate, many cities and counties levy their own additional sales taxes. This creates a combined sales tax rate that can differ from one town to the next. To gauge the impact of sales tax, it is important to consider the average combined state and local rate, as these are consumption-based taxes where higher spending leads to higher taxes paid.

Property Taxes

Property taxes are a component of the tax burden for homeowners and are collected at the local level by a county or municipality. The revenue is a primary funding source for public schools, police, and fire departments. The amount of property tax owed is based on the assessed value of a property and the local tax rate. Because these rates are set locally, they can vary substantially between different cities or counties within the same state.

States with No State Income Tax

Nine states do not levy a broad-based personal income tax, which can result in higher take-home pay and allow retirement savings to last longer. These states must generate revenue through other means to fund public services, often relying more heavily on sales and property taxes. This creates a system of trade-offs where the benefit of no income tax might be offset by higher costs in other areas.

The states with no personal income tax are:

• Alaska
• Florida
• Nevada
• New Hampshire
• South Dakota
• Tennessee
• Texas
• Washington
• Wyoming

Washington does not tax regular income but has a 7% tax on certain long-term capital gains from the sale of assets like stocks and bonds. New Hampshire, which historically taxed only interest and dividend income, is phasing out this tax to become fully free of personal income tax in 2025. However, it has one of the highest effective property tax rates in the nation.

Texas compensates for its lack of an income tax with high sales and property taxes, with an average combined sales tax rate over 8%. Tennessee also has one of the highest average combined sales tax rates nationwide. Florida and Nevada rely heavily on sales taxes bolstered by their large tourism industries.

Alaska has neither a state income tax nor a statewide sales tax, funding its government primarily through revenues from its oil and gas industry. South Dakota and Wyoming also lack an income tax and have relatively low sales tax rates, with Wyoming relying on taxes from natural resources.

States with the Lowest Overall Tax Burden

While no income tax is appealing, a more comprehensive measure is a state’s “overall tax burden.” This metric calculates the total state and local taxes paid as a percentage of residents’ total personal income. A state might levy an income tax but have such low property and sales taxes that its residents pay a smaller portion of their income in total taxes compared to a resident of a no-income-tax state.

Alaska consistently ranks as the state with the lowest overall tax burden. With no state income or sales tax, its residents pay a very small percentage of their income in taxes, primarily through local property and sales taxes. The state’s reliance on revenue from its natural resources allows it to fund services without significant taxation on its residents.

Wyoming also has an extremely low tax burden. It has no personal or corporate income tax and benefits from revenue generated from taxes on mineral extraction. This allows the state to maintain low sales and property tax rates.

Delaware presents a different model. While it has a progressive income tax, it has no state or local sales tax, which significantly lowers the burden on consumers. Its property taxes are also among the lowest in the nation, a combination that leads to a low overall tax burden.

Tennessee also ranks among the states with a low overall tax burden. Although it has one of the highest combined sales tax rates, it has no broad-based income tax and relatively low property taxes. For many residents, the savings from the absence of an income tax can outweigh the higher sales tax.

Evaluating a State’s Tax System for Your Situation

Choosing a state based on its tax system requires a personalized analysis. The best financial choice depends on an individual’s specific circumstances, and a state that is a low-tax haven for one person could be a high-tax environment for another.

First, examine your income, including its level and source. High-income earners may find significant savings in a state with no income tax. A retiree whose income is mostly from Social Security and pensions might prefer a state that exempts retirement income, even if it has a modest tax on wages.

Your spending habits are another factor. If you are a high consumer, a state with a high sales tax could have a substantial impact on your finances, potentially negating other benefits. In this scenario, a state with no sales tax might be more advantageous.

Finally, consider your plans for homeownership. If you plan to purchase an expensive home, a state with high property taxes could result in a large annual tax bill, regardless of its other tax policies. Comparing effective property tax rates in the specific areas you are considering is an important step in understanding the true cost of living.