The U.S. government collects a portion of every working American’s paycheck. States are free to levy an additional income tax. While taxes on individual incomes are a significant source of revenue for most states, a handful of states have no individual income tax.
24/7 Wall St. reviewed state level tax codes using tax data compiled by tax policy research organization Tax Foundation.
The seven states with no income tax are: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. These states are not clustered in any particular region, although none are in the Northeast.
In an interview with 24/7 Wall St., Morgan Scarboro, policy analyst with the Tax Foundation, explained that many of these states see individual income tax as economically harmful. Income taxes are paid by individuals, who earn income at a job or as business owners. For Scarboro, such income is what stimulates economic growth, and these taxes, “can discourage investment,” she said.
States collect taxes from a range of sources in order to fund public services and budget obligations. Individual income taxes account for 36% of tax collections across all states. The seven states with no individual income tax need to compensate with revenue from other sources.
There is no one-size-fits-all state tax policy. A myriad of cultural, historical, and economic factors help explain the differences in state tax structures. At the root of a state’s tax system is what Tax Foundation experts characterize as a deal between residents and their governments.
In other words, the level of taxation in an area is tied to the level of services desired by citizens, which for Scarboro, is “heavily dependent on the state.” Some states with extremely high taxes also provide excellent public services, while some states with low taxes provide comparatively few services.
A state’s resources and industrial composition heavily influence tax policy. Alaska and Wyoming make up for lost income tax revenue through severance taxes on resource extraction. Other states, like Florida and Nevada, fund public services and meet budgetary obligations largely with sales tax revenue from tourism.
On the whole, the states with no income tax collect less in taxes. Five of the seven states reported lower-than-average state and local tax collections in fiscal 2015.
A state’s tax policy is by no means set in stone. For example, though Alaska has not levied a personal income tax since 1980, state lawmakers are currently considering a bill that may end the longstanding trend. For decades, Alaska has been able to rely heavily on severance taxes on oil and gas production to fund government operations. However, since global oil prices fell in 2014, the state’s coffers have all but dried up.
On the other side of the equation, Tennessee may soon join the ranks of states with no individual income tax. Currently, the state only taxes interest on dividend income above a certain threshold. However, the Tennessee General Assembly recently passed legislation that will phase out the state’s only form of income tax by 2022.
To identify the states with no income tax, 24/7 Wall St. reviewed the tax code in each state using the latest tax data compiled by tax policy research organization Tax Foundation. Personal income per capita for each state is for 2015 and came from the U.S. Bureau of Economic Analysis. State individual income tax collections per capita are for fiscal 2015; state and local property tax collections per capita are for fiscal 2014; state general sales tax collections per capita are for fiscal 2015 — all from the “Tax Foundation’s Facts & Figures 2017: How Does Your State Compare?” report. Sales tax rates, including combined rates, gasoline excise tax rates, cigarette excise tax rates, spirit and wine excise tax rates are as of January 1, 2017 and were also provided by the Tax Foundation.
These are the states with no income tax.