How do 9 states get by with no income tax? A tax expert explains the trade-offs they choose

A group of people rallied in 2014 to change Illinois’ constitution to eliminate the flat tax, which has everyone pay the same income tax rate. They wanted higher tax rates for wealthier people and lower ones for poorer people. However, voters rejected making that change. AP Photo/Seth Perlman^[6]

Among the states that do have a personal income tax on wages, the tax rates can either be the same percentage of everyone’s income or they can vary^[7] depending on how big the person’s paycheck is. In some states, tax rates increase as a taxpayer makes more money.

No income tax doesn’t mean tax-free

The nine states that don’t have an earned income tax^[8] are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. Two of those – New Hampshire and Washington – do tax some income, such as money earned from stocks and other investments, but they don’t tax income earned from working.

When a state doesn’t impose income taxes, it often imposes 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 a person’s home value. Or they may rely on cities and counties to impose those taxes to pay for services. For example, Tennessee has no state income tax, but it has one of the highest combined state and local sales tax rates^[9] – 9.548% – of any state.

On the other hand, Alaska is one of the lowest-tax states^[10]. It does not have a state income tax or state sales tax. Alaska does, however, have a state property tax, and it is able to impose significant taxes on the oil and gas companies that operate there. Its cities and other local jurisdictions can also impose sales tax at the local level, and they often do.

Pros and cons of no state income tax

There are both benefits and drawbacks to living in states that don’t impose a state income tax.

You might save money. But that doesn’t mean you will pay no taxes, and there are trade-offs to consider. Sometimes, states with no income taxes do not have the best public services.

For example, you may want to move to a state such as Texas to avoid paying income taxes, but you will need to be prepared to pay more for health care. In general, Texas has some of the lowest government spending on health care^[11] or public transportation.

When states impose higher property taxes or sales taxes to bring in enough money to make up for the lack of an income tax, that can also affect the overall affordability of living in a no-income-tax state.

This matters the most for lower-income people because state sales taxes have a greater impact on overall affordability. For example, students going to college and working part time may have low incomes. But if they live in a state with a high sales tax instead of an income tax, they will be paying the same high rate as fully employed people with much higher incomes. As a result, the students may struggle more to make ends meet than the full-time worker.

Remember, too, that in most cases, Americans still pay some tax on their income. Even if a person isn’t subject to state income tax, the majority of the U.S. population^[12] pays federal income tax, and for many people, those federal taxes^[13] are quite a bit 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 CuriousKidsUS@theconversation.com^[14]. Please tell us your name, age and the city where you live.

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