Every citizen of the United States is required to pay federal income tax, and some taxpayers must pay a separate state income tax. There are only nine states that do not have state income taxes as of 2022:
- New Hampshire
- South Dakota
Living in a state with income tax may seem illogical since it only adds to your budgetary load. Nevertheless, living in a jurisdiction with no income tax has both advantages and disadvantages.
Pro: You will only be required to pay federal income tax
In 2022, the highest federal income tax level will be 37%. The federal government will already receive a considerable portion of your income if you fall into this tax bracket. If you add state income tax to that, especially in a high-tax state like California, your overall income tax liability can reach almost 50%. Such rates are sufficient to induce some wealthy earners to relocate from high-tax jurisdictions like California to tax-free states like Texas.
Con: Other taxes might be higher.
States with no income tax are neither extraordinarily affluent nor generous and have a different revenue-raising mechanism. Without income tax money, these states must find alternative revenue streams.
This typically results in increased sales, property, and/or gasoline taxes. The property taxes in New Hampshire and Texas are considered some of the most expensive in the nation, at 1.89 and 1.6%, respectively. At 49.4 cents a gallon, Washington has the third-highest fuel taxes in the country.
Depending on your lifestyle, you may not be required to pay state income tax, but your overall tax burden may increase. For instance, your tax payment will likely be smaller if you do not own property and rely on public transportation. But your tax burden might be substantial if you own pricey real estate and travel in a gas-guzzling vehicle.
Con: Reduced spending on infrastructure and education
In certain instances, the absence of a state income tax results in fewer state revenues, which may result in reduced state spending on essential services. South Dakota and Wyoming, two states with no income tax, spend the least on the education of the 50 states, according to a 2021 analysis by the United States Census Bureau.
Other states without income tax revenue may reduce expenditure in infrastructure and other areas. You, as a resident, must choose if this trade-off is worthwhile.
Is It Preferred to Live in a Tax-Free State?
Whether it is preferable to reside in a state with no income tax relies partly on your financial circumstances, but there are more factors to consider. For instance, quality of life and how you choose to live are equally essential.
Remember, from a strictly financial perspective, that your income significantly impacts your tax status. For example, if you are a single California resident making $1 million yearly, your tax rate is a staggering 13.3%. However, tax rates are not very demanding if you earn a low-to-moderate salary in California. Since, with any financial matter, there is no black-and-white answer to whether a tax-free state is preferable, personal circumstances come into play, such as health, access to medical care, and family. All of these should be taken into consideration as well.