If you're tired of seeing a chunk of your paycheck disappearing each payday, you aren't alone. Depending on where you live, state taxes make up as much as 37 percent of a state's tax collections.
The extra paycheck deductions may make you want to move to one of the states with no income tax. But should you?
Why Don't Some States Collect Income Tax?
It may seem like a great deal to live in a state with no income tax. But there's more to the story than your take-home pay.
Every state has necessary expenditures that are funded by a budget, and that budget must be funded. Some funding sources include licenses, fees, even running the lottery – but the majority comes from taxes, and income tax is a significant contributor to the budget.
If the state skips out on income tax, they're most likely making it up somewhere else. For example:
- Sales tax – Tennessee, for example, has a much higher sales tax rate than any other state. At 9.47 percent, they take the number one spot in sales tax. Compare it to Florida (another no income tax state) whose sales tax is 7.05 percent, or South Dakota with a 6.4 percent rate, and you can see the difference.
- Property taxes – New Hampshire and Texas charge inflated property tax rates. They fall into the top 5 states with the highest property taxes, with New Hampshire charging 2.06 percent and Texas charging 2.15 percent. The average property tax rate throughout the US is 1.17 percent for reference.
- Reduced financing for secondary education – State-funded colleges in states with no income tax tend to charge higher rates and offer less financial support. Even two-year colleges in states like New Hampshire have some of the highest tuition rates compared with other states that collect income taxes.
- Gas taxes – Drivers pay federal and state taxes at the pump, but some states charge much more than others. Washington, for example, charges 49.5 cents per gallon, versus the country average of 31.7 cents.
States like Florida rely on higher property taxes and sales taxes but don't overinflate either drastically enough to take the country's top spot.
What States Don't Collect Income Tax?
So, who's on the list of states that don't collect income tax? As of today, these seven states don't collect income tax:
- South Dakota
Even though these states don't charge income tax, they often have a much higher cost of living than the other taxes imposed on them.
Who Might Not Benefit
Income tax is progressive – the more you make, the more you pay. The same isn't true of other taxes, such as property taxes or sales taxes. You pay the same rates no matter your income, disproportionately affecting those with a lower income.
If you move to one of the states with no income tax to see a higher paycheck, it may be a temporary fix. You'll see more money deposited to your bank account each payday, but those dollars won't buy as much when you go to spend them.
Everyone has to buy necessities: food, clothing, and household goods. It's difficult to shop without paying sales tax, so if you live in a state like Tennessee with inflated sales tax, you may see even more of your paycheck disappear to support your daily cost of living.
The total cost of owning a home can become more expensive in states with no income tax. While not everyone is a homeowner, just about 68 percent of Americans own a home. Moving to a state with no income tax may seem like a great idea, but if higher property taxes eat up your income, the benefits quickly disappear.
Who Is Likely To Benefit
Wealthy individuals or high-income earners may benefit from living in a no income state tax, though. High-income earners will keep a much larger percentage of their paycheck even with the higher sales tax and property taxes (within reason). When high-income earners can keep more of their income, they tend to invest more, which may help the broader market and economy.
In addition to the wealthy, the following individuals may benefit from living in one of the no income tax states:
- Renters – If you don't own property, you won't directly pay property taxes (though it may be factored into your rent, to an extent).
- The Thrifty – Everyone has to shop for food, clothing, and household goods. But, if you don't shop for other things often, you may save more money without income taxes even with the higher sales tax rates.
- Those without children – States without income taxes may have fewer public services, including public schools.
Should you Consider Moving just for Financial Reasons?
There are many factors to consider when you move or choose where you live, and personal finance is a big one. If you can't afford the state you live in, looking elsewhere may be necessary for your own financial and mental well-being.
If you feel that income taxes eat up your paycheck, you may find yourself living paycheck-to-paycheck or always living on borrowed dollars. But remember, not all states are affordable even without state income taxes.
Look at the big picture before moving. Focus not only on the size of your paycheck but what you'll pay out in other areas. Is it worth living in a state with more expensive colleges, fewer public services, and higher taxes in other areas? Everyone has their own beliefs and ideas, so look at the big picture before deciding – don't focus on only income taxes.