Taxes, unpopular though they may be, fund government services Americans count on every day. Individual income taxes may be especially hated — but they are also important, accounting for 48% of federal tax revenue. For the vast majority of states, income taxes are also critical to governments’ balance sheets. The result? Most Americans pay income tax twice every year — once to federal government, and once to their state.
No two state tax codes are exactly alike, however, and there are a handful of states that manage to function without levying an individual income tax. To identify the states with no income tax, 24/7 Wall St. reviewed state level tax codes using tax data compiled by tax policy research organization Tax Foundation.
In the vast majority of states, individual income taxes represent over 15% of annual tax revenue. Because income tax is such an important and reliable revenue source, the states with no income tax make up for the lost potential revenue in other ways.
Two states on this list, for example, have major tourist industries and raise revenue through higher than average sales taxes. Three other states that levy no income tax are rich in natural resources and are able to bring in additional revenue through taxes on mineral and gas extraction operations. Largely as a result, despite the missed income tax revenue, these states manage to balance their budget just as well as the average state, and do not necessarily have higher debt on a per capita basis.
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 2016 and came from the U.S. Bureau of Economic Analysis. All other data came from the “Tax Foundation’s Facts & Figures 2018: How Does Your State Compare?” report.