Considering a Move? Understanding States With No State Tax and Their Hidden Costs

The idea of relocating to a place where you pay no state tax might sound like a financial dream. After all, eliminating one significant deduction from your paycheck each month could mean more money in your pocket. But before you start packing boxes, it’s worth understanding that the absence of state income tax doesn’t necessarily translate to a lighter overall tax burden. Every state needs revenue to fund schools, roads, emergency services, and infrastructure. Those states without income taxes have simply chosen alternative funding mechanisms — and those alternatives can add up quickly.

The Nine States That Offer Zero State Income Tax Advantage

Nine states have managed to function without collecting state income tax, making them attractive to residents looking to minimize their tax obligations. However, each of these states takes a distinctly different approach to making up for that lost revenue.

Alaska stands out as particularly unique. It not only avoids state income tax but also doesn’t impose a statewide sales tax. Instead, the state’s financial foundation rests on resource extraction — primarily oil revenues flowing through the Trans-Alaska Pipeline System. Some municipalities do collect local sales taxes, but the overall tax structure remains among the most favorable in the country.

Florida has built its economy around tourism and warm-weather living. Retirees and families flock to the state precisely because there’s no state income tax, but they compensate by paying a sales tax rate of 6%, higher than many states.

Nevada presents an interesting case study for high-earners. The state charges no income tax while maintaining a 6.85% sales tax rate. In Clark County, where Las Vegas dominates the economy, the combined state and local sales tax reaches 8.38%. Like Florida, Nevada depends heavily on tourism dollars to stay financially solvent.

New Hampshire takes a more nuanced approach. While residents pay no tax on W-2 wages from employment, the state does collect a 5% tax on interest and dividend income — making it partially income-tax exempt rather than entirely free. This distinction matters for retirees drawing from investment accounts. The tradeoff? New Hampshire residents face the third-highest property tax burden in the nation at 1.61%.

South Dakota offers one of the more genuinely low-tax environments. Besides having no state income tax, it charges only 4.2% in state sales tax, with municipalities able to add up to 2% more. This combination leaves residents with more disposable income, though job opportunities remain limited. The state’s minimum wage reached $11.50 as of January 2025.

Tennessee combines no state income tax with a 7.0% state sales tax, though local and municipal additions push the average to 9.55% statewide. The sales tax burden disproportionately affects lower-income households, but working professionals see none of their W-2 income taxed at the state level.

Texas markets itself as the ultimate no-tax state, with zero state income tax and reasonable cost of living in many areas. However, residents face a 6.25% sales tax and property taxes among the nation’s highest. Adding to the equation is the state’s minimum wage of $7.25 — matched only by the federal floor — which limits earning potential even with the income tax break.

Washington relies almost entirely on sales tax revenue, resulting in a 6.5% rate that ranks among the highest nationally. The upside? As of January 2025, Washington’s minimum wage of $16.66 provides workers with significantly more purchasing power than in neighboring states.

Wyoming may offer the most balanced no-state-tax proposition. It imposes neither personal nor corporate income tax, making it attractive for entrepreneurs and business owners. Sales tax sits at a reasonable 4%, rising to 5.44% with local taxes, and property taxes are remarkably low at 0.55% for owner-occupied homes.

Why Zero Income Tax Doesn’t Always Mean Lower Overall Taxes

The critical misconception about no state tax is that it automatically results in a lighter financial load. The reality is more complex. States still need money to provide services, and when they don’t collect income tax, they shift that burden elsewhere — typically to sales tax, property tax, capital gains tax, or some combination.

Consider the math for a high-income earner living in California, which combines state income tax with federal tax to create a marginal rate exceeding 50%. Moving to Texas or Florida could save substantial amounts annually. However, a middle-income worker or someone planning to retire might find the math less favorable. Higher sales and property taxes can offset income tax savings, especially for those with significant property holdings or high consumption rates.

For retirees drawing from 401(k)s and IRAs, the calculus becomes more favorable. These tax-advantaged accounts are often the primary income source during retirement. In no-state-tax jurisdictions, retirees keep more of every withdrawal, making a meaningful difference on fixed incomes.

Conversely, lower-income households suffer disproportionately from sales tax reliance. A family spending most of its income on goods and services pays sales tax on nearly every dollar, while a high-earner who saves more of their income bears a smaller effective sales tax burden.

Tax Benefits vs. Quality of Life: The Real Cost of No State Tax

Beyond the spreadsheet, the decision to move hinges on factors many financial analyses overlook. States that avoid income tax sometimes allocate fewer resources to education, infrastructure, and public services — a consequence of lower total revenue. Some no-state-tax locations struggle with lower wage prospects, inconsistent job growth, and limited professional opportunities.

Washington and Nevada have addressed this by developing robust tourism and service sectors that provide substantial tax revenue. Wyoming has attracted businesses seeking a corporate-tax-free environment. Yet other no-state-tax states face genuine economic limitations that can undermine the theoretical tax savings.

The quality of schools, road conditions, emergency response times, and overall infrastructure quality directly impact daily life and long-term property values. A tax savings that disappears into depreciated property values or poor educational outcomes isn’t actually a savings at all.

Additionally, relocating carries hidden costs: attorney fees, real estate commissions, moving expenses, and potential disruption to career advancement opportunities. These transition costs can take years to recover through tax savings.

Making Your Decision: A Personalized Framework

Whether no state tax offers genuine financial advantage depends entirely on your personal situation. High-income earners — particularly those in California, New York, or other high-tax states — typically see the most dramatic savings by moving to zero-income-tax jurisdictions.

Middle-income earners should carefully calculate their total tax burden under each scenario, including property taxes and sales taxes. The savings may be modest or non-existent depending on spending patterns and housing costs.

Retirees benefit considerably when drawing from retirement accounts in states without income tax. The cumulative effect over 20-30 years of retirement can substantially enhance purchasing power.

Finally, evaluate whether the lifestyle and economic conditions of no-state-tax states align with your values and career goals. A tax-free location with limited professional opportunities represents a different kind of cost — one paid in career satisfaction and long-term earning potential rather than in dollars sent to tax authorities.

The bottom line: no state tax is an advantage worth considering, but only within the context of your complete financial picture and life priorities.