Why and How Some States Don't Have an Income Tax
And does it matter for where people choose to live?
Author’s note: for those who have come to The Sunday Morning Post today looking for Part II of my AI miniseries after last week’s Part I: The Dove Case on AI, it’s not ready yet. It’s a complex topic and I want to give it a comprehensive effort prior to publishing. So instead, I’m calling this article up from Triple-A to get a spot start in the rotation. Thanks for being here and thanks for reading The Sunday Morning Post.
Why and How Some States Don’t Have an Income Tax
It’s political season here in Maine and, indeed, around the country. One candidate in the Maine Republican primary for governor, Bobby Charles, has called for eliminating the state income tax over the course of four years. This idea has come up in the past here in the Pine Tree State, most notably from previous governor Paul LePage, who did not succeed despite multiple calls and attempts to eliminate Maine’s income tax. The only meaningful income tax adjustment during his eight years as governor was a reduction in the top marginal income tax bracket here in Maine from 8.50% to 7.15%.
Campaigning on eliminating the income tax is one thing. Actually doing it is entirely another. Maine’s income tax, for example, provides about 50% of the revenue the state government needs to operate. The loss of such a significant source of revenue would require a combination of two things that happen to be quite unpopular if not completely impracticable: major cuts to services or significant expansion of other taxes, including the sales tax, property taxes, and the meals and lodging tax. Many people like the idea of not having a state income tax, but they don’t end up liking the tradeoffs that would be necessary to make it happen, which is why it is nearly impossible for states with an existing income tax to eliminate it altogether.
How Some States Do It
And yet, despite the seemingly impossible tradeoffs, some states have achieved an elimination of their state income taxes altogether. Several states have never had an income tax. How have they done it?
The nine U.S. states that do not currently tax wages and income are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. No two states here are exactly the same in terms of how they tax and spend; there are unique attributes to each. Yet there are some themes in common, including higher taxes on consumption instead of earnings, and unique taxes based on the individual economic attributes of each state.
Two or three of these states are truly unique, and are able to avoid an income tax for reasons that are completely non-replicable for other states. Take Alaska, for example. First and foremost, Alaska has a population of about 740,000 people, which makes it the 48th most populous U.S. state, ahead of only Wyoming and Vermont. Even in a remote state where a vast geography creates some complexities in terms of providing services, state government there is not particularly expensive given the low population.
But the real thing that makes Alaska different is how they tax oil and gas extraction. Oil companies that drill in Alaska must pay a combination of lease payments for drilling, “severance taxes” on the oil being removed, and royalties based on the value of what is produced. Because the Alaska state government owns large amounts of mineral-rich land and has a relatively small population, these oil revenues have historically generated enormous amounts of money for the state treasury, which are used to pay for state government in lieu of income taxes.
Even on top of that, in 1976, Alaska voters created the Alaska Permanent Fund to preserve a portion of the state’s oil wealth for the future. A share of oil-related revenues is deposited into the fund each year, which is then invested, essentially functioning like an endowment. The state uses investment earnings from the fund to support government spending and to provide annual dividend payments to all Alaskan residents. So not only does Alaska not have a state income tax, they have this fund that actually pays out dividend checks to residents annually. Pretty cool. Today, because of such strong investment growth in this endowment-style fund, more of state government is funded by the investment earnings than from actual new oil and gas tax revenue.
In case you’re wondering, the Alaska dividend to residents is usually about $1,000 per year, and to be eligible you must have lived in Alaska as a resident for the entire 12-month period prior to the calendar year for which you would get the dividend. So if you move to Alaska later this month, dear reader, which sometimes doesn’t feel like such a bad idea with the state of the world right now, you wouldn’t be eligible for the 2026 dividend; you would have to stay and live there through all of 2027 and then you would be eligible for the 2027 dividend, payable in early 2028.
What About the Other Eight States?
Texas and Wyoming both have something similar to Alaska, although neither is as extensive or comprehensive a funding source for those state governments as the array of Alaska gas extraction taxes and royalties. But in Texas, similar to Alaska, they impose extraction taxes on oil and gas companies to the tune of 4-8% of the market value. When drilling takes place on state-owned lands, the amounts can go up to 20-25%. These funds help to fund state government, with a significant portion going into a Permanent School Fund, which has become one of the largest educational endowments in the country and helps to fund Texas state public schools. Wyoming has something similar, albeit on an even more limited basis.
But oil and gas revenues only fund a portion of what is needed to fund government. The state sales tax in Texas is 6.25%, and cities and counties can impose an additional tax up to 2.00% with revenues kept local. Take Austin, Texas, for example. The state sales tax throughout all of Texas is 6.25%, and Austin has an additional 2% local tax, making the total sales tax burden in Austin 8.25%.
Property taxes are also quite high in Texas, relatively speaking. According to the Tax Foundation, the effective property tax rate in Texas on average is about 1.40%, which makes it the 7th highest property tax rate in the country (the average Maine rate is about 1.00% by the way, which puts us 19th on the list). Hawaii is the lowest property tax state at just an estimated 0.3% rate; Hawaii state government is largely funded by a combination of sales, hotel, airport, and excise taxes, although it should also be noted that Hawaii real estate values are higher than almost anywhere else in the country, so a 0.3% rate on a high-priced home can still be a meaningful dollar amount.
New Hampshire, which is one of the nine states without an income tax, is also among the highest property tax states, ranking 5th overall according to the Tax Foundation. New Hampshire has a political ethos similar to that of Texas (and maybe Alaska, too) of being willing to forgo some services in the name of personal autonomy and more limited government oversight (i.e. “Live Free Or Die,” “Don’t Mess With Texas.”). But, indeed, a lot of the burdens of paying for government are pushed to the local level through property taxes in New Hampshire.
New Hampshire is particularly unique in that not only is there no income tax, there is also no sales tax. That said, New Hampshire does arguably “hide” what might fairly be considered a partial sales tax by taxing certain activities and services even if they don’t technically call it a “sales tax.” New Hampshire taxes meals and lodging, gas, tobacco and alcohol, and vehicle rentals more significantly than many other states, for example.
The Rest of Them
Of the remaining states with no income tax (Florida, Nevada, South Dakota, and Washington), there is a broad theme of taxing consumption rather than wages. Florida, for example, has a high sales tax and especially notable taxes on tourism (e.g. meals and lodging and rental car fees, etc.). Nevada also has high sales and tourism taxes, plus gambling and casino revenues. Washington State has one of the highest sales taxes in the country, topping out around 10%. There are a lot of high earning workers in the Seattle tech industry who are probably especially happy to not have an income tax there. For many, working in Seattle as opposed to, say, California, might represent a 7-10% advantage on pay. In California, the state income tax starts at 1-2% for low-wage earners, but quickly hits 9.3% for income over $70,600 (for single filers), and goes all the way up to 10-12% for those making $360,000 and above. Not having an income tax in Seattle is a real comparative advantage for tech companies trying to attract workers.
Tennessee also has a high sales tax, which can run around 9-10% based on additional local sales taxes.
South Dakota is probably the most benign state of the group. There is no income tax in South Dakota, property taxes are ranked around the middle of the pack for the country, and sales taxes run from 4.2-6.2% depending on local options, which is hardly exorbitant, especially compared to the 10%+ in Washington and Tennessee. South Dakota is probably the one example of where the tax burden from having no income taxes isn’t completely shifted to other taxes, it is just that the state government in this conservative and sparsely populated state is just not as expensive as it is elsewhere.
The Implications
Most of the states without any income tax have been that way for quite some time, and in some cases, forever. It may sound obvious, but it is easier for a state to not have ever had an income tax than to try to convert itself into one now. The reasons for that are political and logistical. As I mentioned at the outset, the income tax in Maine represents about half of state revenues. It is easy in a political stump speech to decry wasteful spending and to advocate for shrinking the size of government. Lots of people are amenable to that. After all, no one is in favor of wasteful spending.
But the practical realities of cutting half of state spending are harsh. You would quickly have to eliminate services that many people rely on, which would put a real hardship on many of the same constituents who would be voting for you (or not) as their candidate for governor or a member of the state legislature.
Unpopular, too, would be raising taxes or creating new fees on other things. Very few people want to pay more in sales taxes, for example, and the tourism and hospitality industries come out in full force against any proposed increases in the meals and lodging tax. I suspect very few people have ever decided not to visit a place due to an add-on to their bill for a local or state lodging tax (we have all seen them on our hotel bills when we visit other places), annoying as they might be. But nonetheless, there is a constituency and a lobby group ready to pounce on any new fee or tax that could be detrimental to their industry whether that’s hotels, restaurants, ski lodges, race tracks, or whatever other industry you could name.
The other implication here is that among the fifty states, there are some wild inconsistencies in how residents, visitors, and businesses are taxed. This is a reflection in the federal nature of our government, which has always granted significant decision-making to the states. This system of state and local control within a national framework results in a patchwork system of taxation that varies from state to state.
Many of these tax structures are highly regressive, by which I mean that for those with less resources, a greater portion of their assets is taxed through a sales tax than an income tax. True, most states absolve many of the fundamental needs of living from taxation, including groceries, utilities, and rents, but if you are a low or moderate income mom or dad in Washington State and your kid needs new shoes, the 10% sales tax is hitting your resources disproportionately harder than it is hitting a Seattle tech worker mom or dad who is making $500,000/year. As the low-income parent, you’d generally be better off with a more progressive income tax where your low wages are taxed at, say, 0-2%, while the tech worker is getting taxed at an average state income tax rate of, say, 8%, which is about what it would be two states to the south in California, and you both paid a lower sales tax.
But again, states get to decide on these questions, and elected officials in every state are going to do what they think is best, but also what their constituents (and their campaign donors and lobbyist influencers) want.
So does the income tax matter on where people choose to live? I can tell you anecdotally in my work as a banker that I have several high earning people who ostensibly are based in Maine, but have either Florida or New Hampshire residency for six months plus a day each year so they avoid Maine income taxes. It may sound crazy to go through all that just to save on taxes, but for someone making $500,000 in wages in Maine, they pay around $34,000/year in state income taxes. The incentive to claim residency elsewhere is high.
According to the U.S. Census Bureau, the top two states for in-migration in 2024 and 2025 were Texas and Florida, which are among the nine no-income tax states. For sure, there are plenty of other reasons why people would choose to move to these states besides the tax structure (the weather, chief among them), but I think there is certainly evidence that people are fleeing high tax states like California and New York for these comparatively lower tax rate states. Austin, Texas, has become a major tech hub and has absorbed a lot of people exiting the higher tax and higher regulatory atmosphere in California, specifically. Washington and Tennessee are also in the top ten states for in-migration, and, as noted above, are both no income tax states, as well. The third best state for in-migration is North Carolina, which has a flat tax of 3.99% on all incomes, and the rate is scheduled to drop to 3.49% in 2027.
The decisions that millions of Americans make each year on whether to move and where to move to are fascinating from a sociological perspective, and worth diving into more deeply at some point. For now, my main conclusion today is that there are a number of reasons why some states do not have an income tax, and it is rarely as simple as just saying those states are either much better at limiting wasteful spending or that they have some type of creative accounting that lessens the tax burden overall. The reasons, in reality, are a combination of unique revenues that can be generated from taxing natural resource extraction, and in other cases, heavy taxation on consumption, particularly in tourism-rich areas of the country like Florida, and to a lesser degree Nevada, Texas, and Tennessee.
Here in Maine, calling for the elimination of the state income tax may help Bobby Charles ride to victory in the June Republican primary for governor, where he is facing several other candidates who have called him out on what they view as unrealistic claims to be able to do so. My prediction is that he will, indeed, win the primary, but will not likely win the general election in what is shaping up to be a blue wave year nationwide. He will be even less likely to actually succeed in eliminating the income tax if he does find himself in office.
Ben Sprague lives and works in Bangor, Maine as a Senior V.P./Commercial Lending Officer for Damariscotta-based First National Bank. He previously worked as an investment advisor and graduated from Harvard University in 2006. Ben can be reached at ben.sprague@thefirst.com or bsprague1@gmail.com. Thoughts and opinions here do not represent First National Bank.
Excellent article. This should be posted wider statewide. That said, I might recommend adding a discussion about taxing non-resident owners at a higher property tax rate than full time residents(I.e. the Taylor Swift tax). Perhaps with a value floor that would naturally exempt older 3-season camps. This would have to be allowed at the state level but would be up to each municipality whether and how to enforce. There appears to be broad appeal across the state for something like this.
Great information about the challenge of raising money to fund government.
But if we think about taxation and policy, from a results prospective, is there a role model that seems to be achieving enviable results?
I write this from my hotel in Tallin, Estonia, population 1.4 million, about the same as Maine. They have been ruled by their neighbors, except for twenty years following the Russian Revolution, and then again in 1991 when the Soviet Union ended. So it’s a country that had little or no say in their public policy for most of their 1,000 year history.
Their post-Soviet public policy nurtured the dynamic, creative founders of Skype, who sold it to E-Bay in 2005 for $2.6 billion.
Think about that. In just 24 years Estonia’s new public policy resulted in a team of their citizens, creating and selling a multi-billion dollar business.
Wow, what would Maine looked like if we had nurtured creative folks like Estonia did! What did we do differently over those 24 years? Can’t we make a drastic change? If we keep doing what we have been doing, we will keep getting what we’ve been getting.
I don’t know the list of the policies, but someone does. It makes me curious to know what Estonia is doing.
The techies seem to be doing very well, but how are the Estonian people doing? Wikipedia describes it as a “developed country with a high-income, advanced economy, and Europe membership. Estonia is among the least corrupt countries in the world. It ranks very high in international rankings for: education, human development, press freedom, online public services, and the prevalence of technology companies.”
In 2000 Estonia became the first country in the world to pass legislation that established the legal framework to guarantee access to the web as a basic human right!
In addition, Estonia is further north than any city in Maine or in the United States.
If we started with making Maine the number one least corrupt state in the US, that would be an important start. Maine isn’t in the top five most corrupt states, so that is a good start. Maine also isn’t in the five least corrupt states, so we have an opportunity to enhance our trustworthiness and credibility.