How Much Do You Save With No State Income Tax?

States have diverse revenue sources, including income tax, to meet their financial needs. However, not all states rely on income tax to the same extent. Some states have no state income tax, and this leads to varying savings for residents. Whether you can actually save money depends on the state's overall tax structure and spending habits.

Understanding the Tax Landscape

You might think that no state income tax means automatic savings, but it’s not that straightforward. States that don't collect income tax often make up for it with other sources of revenue, such as property taxes and sales taxes. Therefore, it's essential to consider the entire tax picture when moving to a new state.

Personal Experience with Moving to a No-State Income Tax State

I lived in California for two years, and my annual state income tax was about $6,000. After moving to a state without a state income tax, my situation looks different due to the combined effect of higher property and sales taxes.

Comparing Property Taxes

My new state has higher property taxes, but thanks to lower property values, my actual property tax bill is about the same as in California. For example, my new state's property tax rate is higher, but the value of my property is lower, resulting in similar tax payments.

Evaluating Sales Taxes

In my new state, there are higher sales taxes, but the impact isn't as significant as one might think. While my hometown in California had a low 1.5% sales tax and most food items were not taxed, my current state has charged sales tax on all purchases, though slightly lower at the same rate of 1.5%. Overall, the difference in net impact is minimal.

Net Savings Breakdown

The bottom line is that I save at least $6,000 annually in state income taxes. Then, I need to factor in additional expenses like vehicle registration fees.

Vehicle Registration Fees

Before moving, my vehicle registration in California was $200 per year. With the impending fee structure change, it was anticipated to increase. In my current state, the auto registration fee is significantly lower at $8.44 per year, plus an additional $3 for mailing new tags. This represents a substantial saving, even with the mailing cost.

Staying Informed: On-Demand Property and Sales Taxes

It's also important to keep in mind that tax structures can vary greatly from one state to another. For instance, I previously lived in Louisiana for 57 years, and the tax landscape there included income taxes, property taxes, and sales taxes. After moving to Texas, where there is no state income tax, the experience has been different.

Comparing Property and Sales Taxes in Louisiana and Texas

In Texas, where there is no state income tax, I now pay about $1,700 more in property taxes for a similarly valued home compared to Louisiana. However, last year, I paid about $400 less in sales taxes due to the lower rate in Texas. Consequently, my overall tax savings in Texas amount to about $2,000, considering the reduction in income taxes plus the benefit from lower sales taxes, offset by higher property taxes.

Conclusion

In summary, while no state income tax can offer significant savings, it’s crucial to evaluate your total tax impact, considering property and sales taxes. The exact savings will differ based on the specific state you're considering and your personal financial situation.