Advantages and disadvantages of living in a state without income tax
Every U.S. citizen is responsible for paying federal income tax, and some taxpayers must also pay separate state income tax. In 2022, only nine states impose no additional income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.
At first glance, it may seem like there’s no reason to live in a state with an income tax, because it just adds an extra financial burden to your budget. But there are both pros and cons to living in a state that has no income tax.
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Pros: you will only have to pay federal income tax
The highest federal tax bracket for 2022 is 37%. If you are in this bracket, you will already be paying a significant portion of your income to the federal government. Adding state income tax on top of that, especially in a high-tax state like California, can drive your total income tax bill up to over 50%. Such rates are enough to push some high earners away from high-tax states like California toward tax-free states like Texas.
Disadvantage: other taxes could be higher
States that have no income tax are not excessively wealthy and benevolent. They just have a different structure for generating income. In the absence of income tax, these states must obtain this income from other sources.
Typically, this results in higher sales taxes, property taxes, and/or gasoline taxes. For example, homeowners in New Hampshire and Texas pay some of the highest property taxes in the country, at 1.89% and 1.6%. Washington charges the third highest gasoline taxes in the nation, at 49.4 cents per gallon.
Although you may not have to pay income tax, your overall tax bill could actually be higher, depending on your lifestyle. If you don’t own property and use public transport, for example, your tax bill will likely be much lower. But if you own expensive real estate and drive a gas-guzzling car for your daily commute, your tax bill could be significant.
Cons: lower spending on infrastructure and education
In some cases, the absence of state income tax results in lower revenues for individual states. This, in turn, can lead to lower state spending on basic services. According to a 2021 analysis by the US Census Bureau, South Dakota and Wyoming — two states with no income tax — spent the least on education of the 50 states.
Other states without tax revenue may cut spending in other areas, such as infrastructure. As a resident, you will have to decide if this trade-off is worth it.
Is it better to live in a state without income tax?
Ultimately, whether or not it’s better to live in a state with no income tax partly depends on your personal financial situation, but there are other considerations as well. For example, the quality of life and the lifestyle you choose to live are also important.
From a strictly financial point of view, it is important to remember that the amount you earn plays an important role in your tax situation. If you’re a single taxpayer living in California earning $1 million a year, for example, the tax rates reach 13.3%. However, if you earn a low to moderate salary, the tax rates are not that onerous, even in California. As with any financial question, there is no black and white answer as to whether it is better to live in a state with no income tax, as a number of personal factors come into play.
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This article originally appeared on GOBankingRates.com: Pros and Cons of Living in a No Income Tax State