12 Surprising Downsides To Living in a State Without Income Tax

Nine states don't charge income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. 

While not paying a state tax on your income is a plus, it’s not all roses. It often means you have higher property taxes, lower infrastructure spending, and a higher cost of living due to people flocking there to escape high-income taxes elsewhere.

If you're looking to stay ahead financially, here are 12 downsides that should be on your radar if you’re considering moving to a state with no income tax.

IRS data show that states without an income tax have grown at twice the rate of other states.

That’s great if you’re already there, own a home, and have a job. But it’s making these states more competitive in these areas, which may make it difficult for newcomers.

If you plan to send children to public school, then education spending is probably high on your checklist for desirable places to live.

With less tax revenue, these states may have less to spend on education. This is the situation in South Dakota and Wyoming, both no-income-tax states, which are at the very bottom of education spending, according to the U.S. Census.

With more people moving to an area, more people will need housing. Then, it becomes a simple supply and demand calculation: More people want homes, and builders can’t build new houses fast enough.

Consequently, real estate prices skyrocket, becoming unsustainable for the average person. This has happened in no-income-tax states like Tennessee and Texas.

When you have a massive number of people moving to a state, the economy will grow, but it may not grow fast enough to keep up with the new population. 

Employment growth has lagged behind population growth in no-income-tax states. Consequently, jobs for those between the ages of 24 and 55 have grown more slowly in these states, making it harder to move beyond living paycheck to paycheck.

States have to make up the lost revenue from no income tax somewhere, and, in some states, that means a higher sales tax.

Take Washington State, for example. Their combined state sales tax (6.5%) and city/municipal sales tax rates are as high as 9.29% in some areas of the state. That’s higher than many states that do have an income tax.

Another place states without an income tax will make up the difference is at the pump. You’ll see a high gasoline tax in some of these states, including Washington state, which is 49.4 cents per gallon. 

That’s the third highest in the country and affects everyone's ability to save money on their car, no matter their income. It’s a lot of money if you do a lot of driving.

Property taxes are a popular place for no-income-tax states to make up lost revenue.

Texas and New Hampshire have two of the highest property tax bills in the entire country. New Hampshire clocks in at 1.77%, while Texas is 1.6%. For context, the lowest is Hawaii at 0.27%.

Similar to K-12 education spending, universities may see less state funding if there’s less tax revenue.

That’s the case in New Hampshire, which doesn’t have a state income tax, and its in-state tuition for a four-year state university is the second highest in the country.

The state and local taxes (SALT) deduction means that most taxpayers who itemize their taxes get a maximum deduction of $10,000 on their federal tax return. However, without income tax, you probably won’t be able to hit that $10,000 number.

In states with an income tax, more of the tax burden falls on those making more money.

However, in states that rely on sales or gasoline taxes to pick up the slack, the burden will fall on all those who need to buy necessities, drive, or buy food.

With less money coming in via income tax, a state also has less money to spend on big and small infrastructure projects.

That means there’s less money to pour into roads, water supply, electrical grids, and even telecommunications. This could become frustrating as you spend more money on maintaining or paying for things you thought were part of the government budget.

As a state becomes more popular, thanks to its lack of a state income tax, more people move in. That means prices go up.

Everything from groceries to daily necessities will respond to supply and demand, potentially negating an individual’s savings from no income tax.

No income tax sounds like a best-case scenario, but it doesn’t mean that you’ll avoid taxes completely. Often states will find a way to make up that lost tax revenue elsewhere.

Before you pack your bags to move to Texas or Florida, consider your individual tax situation. If you’re a high earner who doesn’t own property, moving to a state without an income tax could definitely save you money.

But if you’re a retiree who plans to buy a new place in a state without an income tax, you may need to supplement your Social Security first to cut down on your sales tax.