While you’re sitting down and filing your taxes this year, you may be wondering how you can avoid paying your state income taxes next year.
Lucky for you, there are seven states that you can move to without any state income tax.
The seven states with no income tax are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. There are two more states that are included in the list of states without income tax with a small caveat. Tennessee and New Hampshire have no state income tax but they do levy taxes on dividends and income from investments.
Is it better to live in a state with no income tax?
Let’s do a quick, back-of-the-napkin calculation on how much you could save if you lived in a no tax state:
If you made $70,000 last year and your state income tax was around 6%, you would pay around $3,500 in state income tax. If, however, you lived in one of the seven states with no state income tax, you would be paying $0 to your state.
Over the course of a 40-year career (assuming you continue to be paid $70k a year), you could save an extra $140,000 if you lived in a state with no income tax.
If instead of paying the state, you paid yourself that money each year by putting it into a retirement account with a 7% interest rate, at the end of your 40-year career you would have amassed a small fortune of $747,633. That’s the magic of compound interest.
Now, before you go rush to pack your bags and tell your boss you’re moving to a no tax state, let’s figure out how states can afford to not levy income taxes. There’s always a hidden cost.
In 2016, state income tax accounted for 37% of state tax collections. That’s a large amount.
So how do no tax states make up for not levying income taxes? Take a look around. Pretty much everything you buy is taxed somehow. Sales taxes, property taxes, and corporate state taxes make up a large amount of lost revenue. All these different taxes vary among the states. It goes without saying that the states with no income tax seem to have higher-than-average sales tax.
Tennessee, for example, has the second highest combined (local and state) sales tax rate in the country. At 9.46%, it is well above the nation’s average.
Other states, like Alaska and Wyoming, rely heavily on their natural resources to generate their revenue.
Some states have a higher corporate income tax. They prefer that the companies within their state bear more of the tax burden than their citizens. For example, while Alaska has no income tax for its citizens, they charge a 9.4% tax to corporations within its borders.
With the extra taxes and other factors, Alaska, Nevada, Washington, and New Hampshire all have a higher cost of living than the national average. Which means, you may not actually be saving as much you thought you would be by moving to a no income tax state.
So while the benefits of living in states with no income tax aren’t as clear-cut as they would seem, it may make you think about moving.
Another issue to consider when thinking about the benefits of living in a state without an income tax is your own personal ideology.
If you believe that the government has an active responsibility to shape society, then you should have no issues paying your state income taxes. They allow the state to help redistribute the wealth to those who are in need. It also allows policymakers to give tax breaks to individuals who contribute positively to society by donating to charities, buying solar panels, etc.
If on the other hand, you believe that the government should stay clear of trying to shape society, then moving to a state without personal income tax might be right for you.
What’s your opinion on personal income tax?