States With the Lowest Overall Tax Burden (Income, Property & Sales)

 

How much are you really paying in state taxes?

It’s a harder question than it sounds. It may be impossible to calculate the true total, given how many taxes, fees, and fines are hidden.

But you can estimate the average tax burden in each state by combining the three largest taxes: income tax, property tax, and sales tax. As a percentage of the average taxpayer’s income, the difference between the highest and lowest states’ tax burdens is striking. It can mean thousands of dollars per year.

If you’re thinking about moving to a new state, consider the taxes you will incur, then take a look at the 10 states with the lowest overall tax burdens.

The 3 Primary State Tax Types

All states impose taxes. They have a government to run, after all. Most states charge income tax, sales tax, and property tax, while a few states only impose two out of these three (more on that shortly).

Each state charges different rates for each tax type. One of the best analyses of state tax burden data is from WalletHub. It converts each state’s property and sales taxes to a percentage of the typical taxpayer’s income, enabling you to compare apples to apples by considering the total percentage of taxpayer income collected by each state.

But first, it’s worth pausing to explain each of the primary tax types.

Income Tax

When you file your federal income taxes, you generally fill out an additional form or two to file with your state’s revenue agency. And you pay them a hefty chunk of your annual income.

Most states impose a progressive tax rate like the IRS does. The more you earn, the higher the percentage of your income that you pay. Some states require you to pay capital gains taxes as well.

As a general rule, more-liberal states favor higher income taxes, progressing at steeper increments. The logic goes that taxing income is the most direct way to tax wealthier residents at higher rates, as opposed to property or sales taxes, which tend to be flat.

Consider California. At the lowest income tax bracket, California charges 1% of taxable income. Earners in the highest bracket pay 12.3% of their taxable income to the state.

There are seven states in the U.S. that charge no income taxes at all: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Two other states, New Hampshire and Tennessee, don’t charge income taxes on wage income, but they do collect taxes on investment income such as interest and dividends.

Property Taxes

Property taxes are typically charged by local governments rather than the state. Still, it’s possible to average the property taxes paid in each state, then convert that to a percentage of income.

In most cases, municipalities charge a flat property tax rate based on the value of the property. Whether your property is worth $150,000 or $1,500,000, you pay the same percentage of the assessed value.

Critics protest that property taxes are inherently inaccurate, since property values must be estimated based on nearby home sales, which may or may not be comparable to your property’s value. Property taxes also create a large bureaucracy, requiring assessors, inspectors, people to review disputed values, and more. (Side note: Always appeal your property’s assessment if it looks high.)

Other critics note that it penalizes property owners for improving local housing. For example, it disincentivizes landlords from renovating their rental properties and raising the quality of local housing.

Sales & Excise Taxes

Like property taxes, sales taxes are typically flat rates that are the same for everybody, but not always. For example, in New York City, consumers pay 4% to New York State and 4.5% to New York City for clothing items over $110, and no sales taxes for clothes under $110. Most other goods and services are taxed at a total sales tax rate of 8.875%: 4% to the state, 4.5% to the city, and another 0.375% for the Metropolitan Commuter Transportation District surcharge.

This example raises a second point: On top of the state sales tax rate, some cities also charge their own sales taxes.

Excise taxes are similar to sales taxes, but typically are imposed on specific goods. They may be imposed at the time of manufacture or at the time of sale. Common excise taxes include alcohol and fuel (more on these momentarily).

Because sales tax rates are usually flat, many liberal economists argue against high sales tax rates in favor of higher income tax rates. They may refer to sales tax as a “regressive” tax, arguing that lower-income earners end up spending a higher percentage of their income on goods and services and therefore pay a higher percentage of their income in sales tax.

The counterargument is that taxing consumption discourages the “bad” behavior of overspending rather than penalizing the “good” behavior of earning more money or improving your property.

Regardless of your political leanings, compare state sales tax rates before choosing a state to live in.

Currently, five states do not charge sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. These states and those that don’t charge income taxes make up most of the top 10 list for lowest tax burden.

Less Obvious State Revenue Sources

Income, property, and sales taxes aren’t the only ways state and local governments collect money from you.

Some states impose inheritance taxes, taking a chunk out of your estate when it passes to your children. It’s one of those taxes most people don’t think about until they plan their estate or receive an inheritance and then suddenly find themselves furious at how much the state takes.

Another not-so-obvious tax is gasoline tax, which is applied to suppliers and hidden from consumers. But make no mistake: That tax passes through to you in the form of higher gas prices.

States also earn a pretty penny by charging tolls on their highways. Depending on where you live and drive, these could add up to hundreds or even thousands of dollars each year.

And don’t forget the DMV. They charge vehicle registration fees, driver’s license fees, emissions testing fees, and other fees to collect more money from you.

Many states also impose “sin taxes” on tobacco, alcohol, marijuana, and gambling. For example, nearly half (44.3%) of the price of an average pack of cigarettes goes to taxes, according to the Tax Foundation. It’s one more reason to quit smoking.


Best States With the Lowest Overall Tax Burden

Whether you’re older and looking for the best states to retire in, or younger and looking to start a family in a more affordable state, taxes matter.

Consider a median-income household, which earns around $62,000 according to the U.S. Census Bureau. In the state with the highest tax burden, New York, an average household can expect to lose 12.97% of their income to taxes according to the WalletHub study. That comes to around $8,040 per year in state taxes.

In the state with the lowest tax burden, Alaska, the average household can expect to lose an average of only 5.1% of their income to taxes. That means the median taxpayer in Alaska only loses around $3,160 per year to state taxes. That’s an annual tax savings of $4,880.

Before committing to living in a certain state, consider these 10 states with the lowest overall tax burden.

1. Alaska

Alaska Cannery Located Bay Pacific Ocean Haines

  • Average state tax burden: 5.1%
  • Property taxes: 3.66%
  • Incomes taxes: 0%
  • Sales and excise taxes: 1.44%

Alaska offers the lowest total tax burden of any state, costing taxpayers an average of 5.1% of their income.

That breaks down to an average of 3.66% of income going to property taxes (the 12th highest in the U.S.), 0% in income taxes, and 1.44% of income going to excise taxes. The lack of income taxes makes an enormous difference, as Alaska is one of the seven states charging no income tax whatsoever.

In fact, Alaska is the only state to charge no sales tax and no income tax at all, including on investment income.

Of course, not everyone loves the weather in Alaska. But for those who don’t mind being a little farther away from the rest of the world, it makes an attractive place to live.


2. Delaware

Delaware Memorial Bridge By Night Reflection

  • Average state tax burden: 5.55%
  • Property taxes: 1.79%
  • Incomes taxes: 2.55%
  • Sales and excise taxes: 1.21%

With no sales tax at all and relatively affordable income and property taxes, Delaware imposes the second lowest total tax burden on residents.

The average Delawarean pays 1.79% of their income in property taxes, 2.55% to income taxes, and 1.21% to excise taxes. That comes to a 5.55% total tax burden. A household earning $62,000 would pay $3,441 in state taxes.

On the employer side, Delaware offers relatively low corporate tax rates.

Delaware also features beautiful beaches and rustic farmland. Geographically, it allows easy access to three major cities (Philadelphia, Baltimore, and Washington D.C.), and sits only around two hours from New York City.


3. Tennessee

Knoxville Downtown Tennessee City Skyline

  • Average state tax burden: 6.28%
  • Property taxes: 1.90%
  • Incomes taxes: 0.11%
  • Sales and excise taxes: 4.27%

Tennessee imposes no income tax on regular earnings and a small tax on income from investments. Low property taxes help reduce the tax burden as well.

The average resident pays 1.90% of their income to property taxes, 0.11% in income taxes, and a higher 4.27% in sales and excise taxes. But of the three primary tax types, sales tax is the easiest to avoid and minimize.

The total tax burden is 6.28%, which means a typical household earning $62,000 would lose $3,894 to state taxes.

Tennessee offers more cities than either Alaska or Delaware, from Nashville to Memphis and Knoxville to Chattanooga. It also features extensive rural countryside and mountains, including the Great Smoky Mountains.


4. Florida

Footbridge Beach Key West

  • Average state tax burden: 6.56%
  • Property taxes: 2.74%
  • Incomes taxes: 0%
  • Sales and excise taxes: 3.82%

With no income tax at all, the typical Floridian pays 2.74% of their income to property taxes and 3.82% to sales and excise taxes. That comes to a total tax burden of 6.56%.

For a median household, that amounts to $4,067 in annual taxes.

Florida’s warm climate, extensive coastline, beautiful beaches, and low tax burden all combine to make it a magnet for snowbirds and retirees — more on that later.


5. New Hampshire

New Hampshire Boathouse Fall Colors Reflecting Echo Lake

  • Average state tax burden: 6.86%
  • Property taxes: 5.45%
  • Incomes taxes: 0.12%
  • Sales and excise taxes: 1.29%

New Hampshire is the other state that doesn’t charge income tax on earnings, but it does charge taxes on investment income. Sweetening the deal even further, New Hampshire is one of the five states that don’t impose sales tax.

That means the state has to make up that revenue elsewhere. In this case, New Hampshire residents pay a nation-topping 5.45% of their income to property taxes on average, alongside 0.12% in average income taxes and 1.29% in excise taxes. As a total tax burden, that comes to 6.86%.

That means a median household pays around $4,253 in combined property, income, and excise taxes.

Although light on cities, New Hampshire is rich in mountains and fall foliage, along with a brief New England coastline. Take advantage of its abundance of nature with more than 90 state parks and less-expensive skiing than its more famous neighbor, Vermont.


6. Oklahoma

Oklahoma City Cityscape Bricktown

  • Average state tax burden: 7.12%
  • Property taxes: 1.66%
  • Incomes taxes: 1.82%
  • Sales and excise taxes: 3.64%

Oklahoma imposes all three tax types. Still, the total tax burden remains relatively low due to low property tax rates and low income tax rates. Average Oklahomans can expect to pay 1.66% of their income in property taxes, 1.82% in income tax, and 3.64% in sales and excise taxes. The total state tax burden is 7.12% of income.

For a median income household, that comes to $4,414 in annual taxes.

Known for its flat agricultural land, Oklahoma offers a few medium-sized cities as well. Oklahoma City has about 1.5 million residents, and the Tulsa metro area is nearing 1 million people.


7. Montana

Oklahoma City Cityscape Bricktown

  • Average state tax burden: 7.27%
  • Property taxes: 3.44%
  • Incomes taxes: 2.58%
  • Sales and excise taxes: 1.25%

Montana imposes no sales tax, helping to keep its total tax burden low. Its property taxes are higher than average — typically 3.44% of income. Income taxes are also slightly higher than average at 2.58%, but excise taxes amount to just 1.25% of income.

All told, that puts Montana’s tax burden at 7.27%. A median household would pay $4,507 in state income, property, and excise taxes.

Montana is stunningly gorgeous in the summer. Winters are harsh, but those looking for a modern “Wild West” feel won’t be disappointed by Montana’s wide tracts and endless skies.


8. South Dakota (Tie)

South Dakota Mount Rushmore National Memorial Park

  • Average state tax burden: 7.28%
  • Property taxes: 2.87%
  • Incomes taxes: 0%
  • Sales and excise taxes: 4.41%

No income tax helps South Dakota maintain a low total tax burden. With 2.87% of incomes going to property tax on average, South Dakota falls in the middle of the pack on that count. Its sales and excise taxes amount to a relatively high 4.41%, though.

That makes South Dakota’s total tax burden 7.28%, or an annual tax loss of $4,514 for the median-income family.

A glut of oil jobs in recent years has boosted South Dakota’s economy and population, driving real estate development and growth. But there’s plenty of wide open land remaining in this sparsely populated state.


8. Alabama (Tie)

Alabama Montgomery State Capitol At Dawn

  • Average state tax burden: 7.28%
  • Property taxes: 1.39%
  • Incomes taxes: 1.89%
  • Sales and excise taxes: 4.00%

Although Alabama imposes all three taxes, its property tax burden is the lowest in the country at 1.39%. Income taxes are also relatively low at 1.89%, but the state charges relatively high sales and excise taxes, averaging 4% of income.

All of this means that Alabama’s total tax burden ties South Dakota’s at 7.28%.

Alabama offers a coastline along the Gulf of Mexico and many charming small cities, such as Birmingham, Mobile, Montgomery, Huntsville, and Auburn.


10. Wyoming

Sunrise Historic Moulton Barn Grand Teton

  • Average state tax burden: 7.51%
  • Property taxes: 4.32%
  • Incomes taxes: 0%
  • Sales and excise taxes: 3.19%

Wyoming is another state that charges no income tax at all. Its sales and excise taxes remain moderate at 3.19% of income, but Wyoming residents pay relatively high property taxes, averaging 4.32% of income.

Combined, that puts Wyoming’s tax burden at 7.51%. For a median-income household, this  translates to $4,656 in annual tax burden.

Like Montana, Wyoming offers sprawling ranches, beautifully rugged landscapes, and few cities. It boasts many charms, but anyone looking for the fast lane or mild winter weather should look elsewhere.


Snowbirding & Moving Legal Residence

All this tax burden talk raises a practical question: Can you move your legal residency to a lower-tax state without having to live there full time?

Look no further than “snowbirds.” Many residents of northern states spend their winters in warmer states such as Florida, Texas, and Arizona. These states, it so happens, all charge far lower tax burdens than states like New York, Connecticut, Minnesota, and Illinois.

But just because you own a second home in another state does not automatically entitle you to become a resident there. Most states follow the “183-day rule,” which states that if you spend at least 183 days each year in the state, they generally consider you a resident and tax you as such. You even risk double taxation if both states where you spend time decide to tax you as a resident.

Generally speaking, if you spend at least half the year in a state, you can make a strong case that you should be considered a resident there. But physically spending time there is not enough. You should also get a driver’s license, set up bank accounts there, list that address as your primary residence on your tax return, and generally create a paper trail tying you to that state.

High-tax states aren’t letting outbound movers go easily, either. Many have started aggressively going after higher-income earners who claim residency in another state, often through tax audits. New York, for example, initiated around 3,000 tax audits on departing residents between 2000 and 2017, per CNBC.

Still, for anyone with a job that lets them work remotely, it may be worth exploring the requirements to change legal residency if you’re open to spending at least part of the year in another state. Just be careful to document a case for that residency, in case your old state audits you.


Final Word

State and local taxes add up to real money. For example, a family earning the median income of around $62,000 would save $4,880 per year by moving from the highest-taxed state to the lowest.

That’s enough money to cover the median family’s retirement savings — all of it. If you invested $4,880 every year at a 10% return starting at age 22, you’d have $2,375,837 by the time you turned 62.

For high-income earners, the savings adds up even faster.

If you’ve been thinking about a change of scenery, start your search with the 10 states outlined above. With the money you save from their lower tax burdens, you can fund your retirement, travel more, or just enjoy being a little wealthier.

Have you thought about moving to a lower-tax state? If not, what’s kept you from doing it? If you’ve made the move, what was your experience?

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