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States without state income tax are those that do not charge income tax on individual and business income earned from state sources. Although residents and businesses housed in these seven states must still pay income taxes at the federal level, they are free from state income tax, which may represent significant savings.
Two additional states tax only income from dividends and other investments. Although avoiding state income tax may seem appealing, it’s important to weigh all the factors, since these states often make up income tax revenue by charging higher taxes in other areas.
Proponents of eliminating state income tax say that doing away with this tax promotes growth, retains educated young workers, and creates jobs. Data from the American Legislative Exchange Council reported by Bankrate indicates that the nine states described above consistently outrank the nine states with the highest income taxes when it comes to these measures.
The lack of income tax is also an effective tool to redistribute wealth, which means low-income individuals are most likely to benefit from living in states that do not charge this tax. On the flip side, however, higher sales tax has a much bigger economic impact on poor residents than it does on those who are well-off.
According to data from the Institute of Taxation and Economic Policy reported in the Bankrate article, although non-income-tax states have higher population growth rates than states with high income tax, they struggle to add jobs at a rate that can accommodate these new residents. This is a particular problem in Wyoming, which has the most substantial gap between population growth and job growth.
Keep in mind that states earn revenue in three main areas: sales tax, income tax, and property tax. This income is essential to fund roads, public works projects, law enforcement, and other services. When income tax is not part of the equation, the other costs will be higher. In fact, several of the states listed above, including Alaska, Florida, New Hampshire, Washington, and South Dakota, have a cost of living well above the national average.
One section of the newly passed tax law caps itemized deductions for state and local taxes at $10,000. This will be detrimental to individuals who live in states like New York and California with high personal income tax rates. Previously, taxpayers could deduct the full amount of their property taxes and sales tax if they were not taking the standard deduction ($6,350 for individuals and $12,700 for married couples filing jointly).
If you’re concerned about your federal or state income tax debt, Solvable can help. We offer a range of effective debt relief solutions, whether you have tax, credit card, or student loan debt that’s impacting your financial bottom line. Get started today by entering some basic information about your debt situation to connect with one of our professional counselors.