What states don't collect income tax?

Colin Lalley 1600


Colin Lalley

Colin Lalley

Insurance Expert

Colin Lalley is the Associate Director of SEO Content at Policygenius in New York City. His writing on insurance and personal finance has appeared on Betterment, Inc, Credit Sesame, and the Council for Disability Awareness.

Published March 30, 2016|4 min read

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No one likes paying taxes, but on some level we all know they’re necessary. They help us pay for the little things – y’know, like roads and schools and stuff.The government collects taxes from many different places, but the one we’re most familiar with is income tax. We all have to go through our paychecks being a lot smaller than we’d hope.Well...not all of us.There are seven states that don’t collect income tax from their taxpayers: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. It sounds perfect, but is it really all it’s cracked up to be? And if these states aren’t collecting income tax, where are they getting their money from?

Why some states don’t collect income tax

The government collected $3.1 trillion in income taxes in 2014, which accounted for over half of all taxes. So how do the seven states that don’t collect them make money? Mainly through other taxes – which are higher than they are in other states.For example, on average, sales tax amounts to 22.5% of total taxes collected by state and local governments. For the states that don’t collect income tax, it accounts for over 30%. Property taxes and other fees are higher in these states than the national average, too.This is the main criticism behind not having an income tax. The income tax system in the United States is progressive, which means that people who make more money payer a higher percentage in taxes. Other taxes, like sales tax, are considered regressive because they’re the same for everyone, so low-income people end up spending more of their total income. In the case of states that don’t collect income tax but have high taxes on other items, like gasoline, the poor pay more.The Institute on Taxation and Economic Policy keeps track of states with the most regressive tax policies. Not surprisingly, states that don’t collect income tax make up four of the top ten.Proponents of removing income tax argue that it makes the state more attractive, bringing in more residents and spurring job creation. Despite there not being any evidence to support it, Louisiana, Kansas, Michigan, Nebraska, Ohio, and Wisconsin are considering cutting or eliminating income tax.

What states don’t collect income tax?

Alaska: Two-thirds of Alaska’s taxes come from various taxes like estate, excise, and stock transfer taxes. They also have the highest corporate income tax in the country. Even though there’s no income tax for individuals, and there isn’t a sales tax. This could all be coming to an end, though: with the heavy drop in oil prices recently, the state is considering reinstating its income tax collection.Florida: Florida doesn’t have a state property tax, but it does have pretty high local property taxes. It also has a high state sales tax, which it can use to collect tax from the abundance of tourists that visit each year.Nevada: There’s no corporate or individual income tax in Nevada. If you guessed that it makes most of its money from gambling, you’d be right. Fees and taxes from casinos and other gambling-related enterprises make up a majority of the state’s revenue sources.South Dakota: The cost of goods and services, along with the sales tax, is relatively low in South Dakota (and there’s no inheritance tax). They get most of their money from high property taxes and they collect even more money from a number of "special taxes" ranging from cigarette excise tax to coin operated laundry license fees.Texas: Texas doesn’t have a corporate or individual income tax, and there isn’t a state property tax, but, like Florida, high sales taxes and local property tax account for most of the state’s revenue.Washington: Washington state collects over 44% of its tax from sales tax, which is nearly double the national average of 22.5%, and property tax accounts for another 30%. It also has one of the highest gasoline taxes in the country, something opponents point to when discussing the regressive nature of states that don’t collect income tax.Wyoming: Most of the tax collected in Wyoming comes from property taxes. That may sound like bad news for taxpayers, but the high value of property and above-average income means that the state can collect a decent amount of money from property taxes while keeping the actual tax, which is a percentage of property value, fairly low – as of 2015 it had the sixth-lowest property tax rate in the country.

Image: Thomas Hawk