As the federal tax filing deadline looms closer and closer, many people are starting their federal tax returns.
For an unfortunate lot, a state income tax return is due as well.
(Here’s our list of the best places to get your taxes done)
Most states within America have a personal state income tax, though not all of them.
And, several of those that do not impose a personal state income tax have other ways of eliciting revenue from their citizens.
States Without State Income Taxes
Here is a list of states that do not impose income taxes: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
How States with No Income Tax Generate Income
Now, before you decide to go rushing off and move to a state that does not levy an income tax, take a quick look at these statistics:
- Tennessee has yet to pass legislation that would require individuals to pay a state income tax, however Tennessee does require its citizens to pay taxes on dividend and interest income. In addition, Tennessee charges a higher state sales tax to compensate for the loss of revenue.
- Alaska has neither an individual state income tax nor a state sales tax. Rather, it charges a state corporate income tax instead.
- Neither Nevada nor Texas has either a personal or corporate income tax provision. Instead, Nevada earns the majority of its revenue through the gaming industry and sales tax while Texas relies heavily on franchise taxes.
- Like Tennessee, New Hampshire has instituted a tax on interest and dividends; however there is no sales tax.
- Wyoming has neither a personal income taxes nor corporate income taxes.
- Florida utilizes proceeds from state sales tax and corporate income tax to offset lost revenue.
As you can see, states that do not require its citizens to pay state income taxes do still collect revenues from the citizenry, just through different means.
These means can be via sales tax, corporate income tax, property tax, tangible and intangible personal property tax and more.
For example, the state of Tennessee does not require individuals to pay a state income tax, however it charges its residents the highest state sales tax levied within the United States, coming in as high as 9.44% in combined state and local sales tax rates.
In addition, this tax is levied on all items sold retail including groceries. It’s no wonder that the state hosts two sales tax free events every year!
Other states that prefer not to charge income taxes choose to levy higher rates against local businesses instead of asking their citizens to shoulder the revenue burden.
While this tactic makes sense from a revenue generation perspective, many companies find the higher cost of operations in these states reason enough to look elsewhere to put down roots.
So, in the end, you have to decide whether paying a state income tax is more beneficial to you over paying a higher sales tax rate.
The good news is that sales tax can be deducted from your federal tax return, which can net you a nice little refund if you itemize!