Americans pay a hefty amount in taxes each year. Looking for ways to avoid paying taxes and saving hard-earned money is a popular discussion topic. Before we go into which states do not have state income tax and no sales tax, let’s understand what is income tax and sales tax, and why states levy these taxes on their population.
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What Is Income Tax?
Income tax is a tax that is imposed on the income of an individual or business by the local, state, or federal government. It is not only imposed on incomes earned as salary or wages, but also on incomes generated as capital gains, dividends, interest, royalties, gambling winnings, lotteries, product sales, and investment returns.
Citizens or residents may be charged a fixed or progressive income tax. A fixed income tax is a percentage of tax that is payable by all individuals, regardless of their income. It does not depend on the amount of income or assets of the individual. A progressive income tax is one where the amount to be paid in taxes increases and is proportional to the income earned. Under a progressive income tax, a person is charged with the amount of tax that matches their payment ability.
What Is A Sales Tax?
A sales tax is imposed on the sales of goods and services and is considered a type of consumption tax. It is generally payable by the end-users of the goods or services. Generally, a sales tax is imposed at the point of sale, so for instance your bill at a restaurant will have some additional amount added to it as a general sales tax, payable by you, the consumer.
Which States Do Not Have State Income Tax?
Out of the 50 states, 7 do not have state income tax as of 2020. These states include:
- South Dakota
Besides these 7 states that do not have an income tax, 2 more states, New Hampshire and Tennesse, do not tax wages, only incomes earned from investment and interest. By 2025, these two states will put a complete ban on income tax as well, bringing the total number of states without a state income tax to 9.
What States Have No Sales Tax?
A total of 5 out of 50 states do not have a state-imposed sales tax. These include:
- New Hampshire
States With the Lowest Income Tax
Besides the 7 states that do not have any state income tax, there are a few states that have a much lower income tax as compared to the rest of the country. The tax rate here is lower than 5 percent. Some of these impose a fixed rate income tax, while others use a progressive tax system. The states with the lowest income tax include:
- North Dakota: 1.1 to 2.9 percent
- New Mexico: 1.7 to 4.9 percent
- Pennsylvania: 3.07 percent
- Indiana: 3.23 percent
- Michigan: 4.25 percent
- Arizona: 2.59 to 4.5 percent
- Kansas: 3.1 to 5.7 percent
- Illinois: 4.95 percent
- Ohio: 2.85 to 4.8 percent
Colorado also imposes a tax of 4.63 percent on the federal taxable income of its residents, subject to modifications.
States With Lowest Sales Tax
Besides the 5 states with no sales tax, we list here 5 more states that have very low sales tax as compared to the national highest of 9.53 percent, levied in Tennesse.
- Hawaii: 4.44 percent
- Wyoming: 5.34 percent
- Wisconsin: 5.46 percent
- Maine: 5.50 percent
- Virginia: 5.65 percent
Though Alaska has no sales tax imposed by the state, local governments and municipality and town administration have the power to impose a sales tax. The Tax Foundation weighs in Alaska’s sales taxes on the state level to be about 1.76 percent.
The big question is, should you move to states that do not have state income tax? States that do not impose an income tax generally make up for it in the sales tax or other taxes. The living conditions in these states may also be much different than other states where an income tax is imposed. You should consider more than the income tax as the sole factor for relocating. For instance, the sales, excise, and property taxes, how affordable it is to live in these states, and the social services and infrastructure of these states. With a lower income tax, the state may not have enough to spend on its hospitals, education, parks, libraries, roads, and networking and communication services.
For instance, Alaska has 0 percent income tax and a 1.76 percent sales tax. That is pretty low compared to some other states that go as high as 9.53 percent for Tennesse. Alaskans pay a total of just 5.10 percent of personal income in total taxes, including property and sales and excise tax. This is the lowest among all states.
At the same time, Alaska is one of the most expensive and difficult places to live in. The US News And World Reports list of ‘Best States To Live In’ ranks Alaska at 44 out of 50 in terms of livability, and 45 out of 50 in terms of affordability. The American Society of Civil Engineers has given a grade of C- to Alaska’s infrastructure in 2017. So before you jump the bandwagon, make sure you are not trading off an escape from not paying state income tax with a tougher, more expensive way of life.
States like Tennesse, which have no income tax except a small amount, have the highest sales tax to make up for it, reaching 9.55 percent. Tennessee has a respectable rank in terms of affordability, coming in at the 22nd spot and 30th on the US News And World Reports list of ‘Best States To Live In’.
And bursting your bubble even further is the fact that you still have to report your income tax to your home state, even if you move and start earning from an income tax-free state. If your home state does have an income tax, you will have to pay it, no matter in which state you earn or live. The same goes for people belonging to non-income taxed nations.