‘No income tax’ states may not be the havens you had in mind

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Published Date 7/2/2024

You know them. People you once called your neighbors who decided to “blow this town” to relocate to another state to save on income taxes. But did you ask them later on if their dream of more cost-effective living came true?

Realtor.com’s Janet Siroto decided to take a look at the nine states that collect no income tax from their residents: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. While these states help shield residents’ income from the IRS, what many of us don’t know is that that doesn’t necessarily add up to saving more money overall. In fact, other expenses in these areas are rising fast, according to Siroto.

While list prices climbed on average 46.6% between May 2019 and May 2024, two-thirds of states with no income tax outpaced this price growth. “Over the past five years, Wyoming saw an 82.0% increase in list prices, the biggest increase of any state. Three other no-income-tax states also saw substantial growth in home prices, including New Hampshire (+76.5%), South Dakota (+65.0%), and Tennessee (+52.7%),” says Siroto.

Slowpokes in price growth among the nine states with no income tax over the past five years were Texas (+26.7%), Washington (+35.6%), and Florida (+36.4%). But residents in these states are getting gouged by other expenses such as home insurance costs due to risk of property damage from climate-related events. And other states with no income tax often make up for it with a hefty sales tax or high property insurance costs, according to Siroto. “All of these extra expenses can add up—making these tax havens less of a bargain than people think,” she says.

Realtor’s senior economist Ralph McLaughlin agrees. “States with no income taxes may be not as affordable [as] one would think for a couple of different reasons. First, wealthy households may seek to establish residency in such states in order to avoid paying income tax. This would mean the state would have a wealthier population base, and a wealthier base tends to be correlated with higher home prices.” He adds that states that have no income tax will need to make up for lost revenue in other ways, which may be from a combination of higher property and sales taxes.

When it comes to home prices being so high in these states, it boils down to low supply and high demand, however. Emigration away from high-tax states like California, Illinois, and New York to no-tax states is driving up property values due to increased demand for housing. The supply? Nearly nonexistent.

What people forget is that when the housing market heats up and prices rise, so do property taxes. “Although residents might not have to pay income tax, their state still needs revenue for all the usual purposes such as paying public school teachers and improving infrastructure,” says Siroto. “Raising other taxes, such as sales, can help fund these services, but that leaves less money in residents’ pockets.” Now pile weather risks on top of that in some of these states and you have a kind of perfect storm, she says.

Florida takes the cake for the nation’s costliest homeowners insurance with the average price per year ringing in at an astonishing $10,996 last year. Texas took fourth place, with an average of $4,456. (The national average is $2,377.)

Siroto offers a look at how people who reside in nine states with no state income tax are faring using data from ATTOM Data Solutions, Insurify, the Tax Foundation, and the U.S. Census Bureau.

National averages? State sales tax is typically between 4% and 7%, property tax effective rate is 1.10%, average property tax is $2,690, and the average home insurance per year adds up to $2,377.

The no income tax states stack up as follows:

While Alaska’s property tax effective rate is at 0.95%, its average property tax is $3,947, average home insurance per year is $1,116 and worth noting is the local sales tax—separate from state sales tax—that can be as high as 7.5% in some areas.

Home insurance costs in Florida have skyrocketed due to the risk of property damage from climate-related events. State sales tax is 6%, property tax effective rate is 0.76%, average property tax is $4,476, and the average home insurance per year is a whopping $10,996 if you can get it at all (many insurers have opted out of offering it).

Nevada’s state sales tax: 6.85%, property tax effective rate sits at 0.48%, and the average property tax amounts to $2,660. Average home insurance per year is $1,224. But gambling gives Nevada significant revenue so its residents still get a pretty good deal tax-wise.

New Hampshire? State sales tax: 0%. Property tax effective rate: 1.25%. Average property tax: $7,172. Average home insurance per year: $1,225. But worth noting: The state collects tax on dividends and interest.

South Dakota’s state sales tax is 4.5%. Its property tax effective rate is 1.01%, while its average property tax adds up to $3,408. Average home insurance per year is $2,562. But the state collects sales tax on purchases (such as groceries) that are often exempt elsewhere.

Tennessee, like South Dakota, also collects sales tax on purchases like groceries that are often exempt in other places. Its state sales tax is 7.0%, and the property tax effective rate is 0.44%, making the average property tax $1,695. Average home insurance per year: $2,470

Texas gets significant revenue from the oil industry. The average price for home insurance per year is $4,456, state sales tax is 6.25%, offering a property tax effective rate of 1.20%, an average property tax of $4,464, and average home insurance per year: $4,456. But parts of Texas are also affected by risky weather, so whether home insurance sticks around all over the state is anyone’s ball game.

Washington has a state sales tax of 6.5%, a property tax effective rate of 0.80%, and an average property tax of $5,640. Average home insurance per year: $1,437. Worth noting: The state charges 7% tax on capital gains over $250,000.

And lastly, over the past five years, Wyoming saw an 82.0% increase in list prices, the biggest increase of any state. State sales tax: 4.0%. Property tax effective rate: 0.53%. Average property tax: $2,930. Average home insurance per year: $2,159. But the state charges sales tax on certain personal care items such as feminine hygiene products and diapers.

Those who relocated to low-tax states might be wondering if they made the right decision. Miles Romney, assistant professor in the Department of Accounting at Florida State University’s College of Business, says, “It is possible that the previous ‘first-move advantage’ has reduced some of the financial benefits of moving to a no-income-tax state. States with low but not zero income taxes, like Alabama, Missouri, and North Carolina, may be appealing alternatives.”

Then again, after all is said and done, it comes down to a matter of where you want to wake up in the morning.

Realtor, TBWS

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