States with no income tax make money primarily through higher sales taxes, property taxes, severance taxes on natural resources, tourism and gaming levies, business taxes on gross receipts, federal transfers, and a long tail of fees and fines. Nine states currently collect no individual income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming, with New Hampshire joining the list fully after repealing its tax on interest and dividend income in 2025.1Tax Foundation. State Individual Income Tax Rates and Brackets, 2026 Each one funds roads, schools, police, and courts like every other state; the mix of substitutes just looks different, and the specific blend varies dramatically from state to state.
Sales and Excise Taxes Do the Heavy Lifting
Retail sales taxes account for about 32 percent of all state tax collections nationally, and in states that skip income taxes the share runs higher. Combined state and local rates in these states frequently land between 6 and 10 percent. Washington and Tennessee both carry combined rates above 9.5 percent, ranking among the five highest in the country.2Tax Foundation. State and Local Sales Tax Rates, 2026 Alaska is the exception: no statewide sales tax, though some local jurisdictions impose their own.
Excise taxes on specific products add another layer. State fuel taxes range from under 9 cents per gallon in Alaska to nearly 50 cents in Washington, with an average across all states of about 33 cents per gallon for gasoline.3U.S. Energy Information Administration (EIA). How Much Tax Do We Pay on a Gallon of Gasoline and on a Gallon of Diesel Fuel Tobacco and alcohol excises also run high. These targeted taxes raise revenue and channel money toward specific costs like road maintenance and public health programs.
Property Taxes Pick Up the Slack
When a state doesn’t tax your paycheck, it often taxes your house more aggressively. Effective property tax rates in several no-income-tax states run well above the national median. New Hampshire’s effective rate sits around 1.77 percent and Texas comes in around 1.58 percent, both ranking in the top ten nationally. Wyoming keeps its effective rate near 0.58 percent, relying more on mineral extraction revenue instead.
Property taxes anchor local budgets in particular. School districts, fire departments, and county governments depend on these assessments as their primary funding source, which means the rate you pay often reflects a stack of overlapping levies from your county, city, school district, and special districts. Two homeowners in the same state can face very different effective rates depending on where they live.
Homestead exemptions partially offset the burden for owner-occupied homes, reducing the taxable value of a primary residence by a fixed dollar amount or a percentage of appraised value. Eligibility typically requires that the homeowner occupy the property as their principal residence as of a specified date. The reductions can be significant, particularly against school district taxes, but they don’t erase the overall pattern of higher property tax rates in states that forgo income taxes.
Severance Taxes on Oil, Gas, and Minerals
States sitting on oil, gas, coal, or mineral deposits can push much of their tax burden onto energy companies and their customers. Severance taxes are levied when companies extract non-renewable resources, and the revenue can be enormous. Alaska’s oil and gas production tax is projected to generate roughly $893 million in a single fiscal year, funding a large share of state operations without touching residents’ paychecks.
Alaska takes this model further than any other state. Revenue from oil production flows into the Alaska Permanent Fund, a sovereign wealth fund that pays an annual dividend to every eligible resident. The 2025 dividend was $1,000 per person, meaning the state effectively pays its residents rather than taxing them. The arrangement works because the resource wealth is large relative to Alaska’s small population, a formula that isn’t easily replicated.
The downside is volatility. Severance collections swing with commodity prices and production volumes. When oil prices dropped sharply in prior years, Alaska faced significant budget shortfalls. States that rely heavily on extraction revenue must maintain reserves or find supplemental income sources to smooth out the lean years. Wyoming and Texas also collect meaningful severance revenue, but neither depends on it as heavily as Alaska does.
Tourism, Gaming, and Hospitality Taxes
Taxing visitors is attractive because the people paying aren’t the people voting. Hotel occupancy taxes, car rental surcharges, and amusement fees all capture revenue from travelers passing through. Combined lodging tax rates in major destinations can climb past 13 percent in Dallas and above 15 percent in Seattle, layering state, county, and city levies. Even Las Vegas, despite Nevada imposing no statewide lodging tax, hits guests with local rates around 8 percent.
Short-term rental platforms like Airbnb and VRBO have expanded the reach of these taxes. Most jurisdictions now require hosts to collect and remit the same occupancy taxes hotels charge, pulling a previously informal sector into the tax base.
Nevada deserves special mention. Its gaming tax, charged on gross gaming revenue at rates up to 6.75 percent for larger operators, produces hundreds of millions annually and allows the state to fund government without tapping residents’ income or imposing especially high sales taxes.4Nevada Gaming Control Board. License Fees and Tax Rate Schedule The casino industry effectively subsidizes state services, which is why Nevada’s overall tax burden on residents remains among the lowest in the country.
Business Taxes That Replace Corporate Income Tax
Skipping individual income taxes doesn’t mean skipping business taxes. Several of these states impose alternative levies on commercial activity that function differently from a traditional corporate income tax. Washington charges a Business and Occupation tax calculated on gross receipts rather than net profit.5Washington Department of Revenue. Business and Occupation Tax Texas imposes a franchise (margin) tax on businesses with revenue above $2.65 million, at rates of 0.375 percent for retail and wholesale operations and 0.75 percent for most other businesses.6Texas Comptroller of Public Accounts. Franchise Tax
Gross receipts taxes hit differently than income taxes. A company with thin profit margins still owes the full tax on its total sales, which can be punishing for high-volume, low-margin businesses like grocery stores or distributors. A company that loses money for the year still pays. Highly profitable firms with modest revenue may pay less than they would under a traditional corporate income tax. The structure also creates a pyramiding effect when goods pass through multiple businesses before reaching consumers, with each transaction adding another layer of tax.
Beyond these headline taxes, states collect revenue through annual filing fees for corporations and LLCs, professional licensing fees for fields like medicine and law, and various industry-specific permits. None individually rival a sales or property tax in total collections, but together they add meaningful depth to the revenue base.
Federal Transfers and Smaller Revenue Streams
Federal grants and transfers make up a significant share of every state’s budget, regardless of tax structure. Medicaid funding alone can represent a quarter or more of a state’s spending. Highway construction dollars flow through the Federal Highway Administration, and disaster relief funds arrive when emergencies strike. These transfers don’t depend on whether a state collects income tax.
Several smaller streams fill remaining gaps. State lotteries direct a portion of ticket sales toward education and senior services. Motor vehicle registration fees, which range widely from around $20 to over $700 annually depending on the state and vehicle, generate substantial sums in states with large populations. Toll roads collected over $15 billion nationally in a recent year, and states with extensive toll infrastructure use that revenue to self-fund highway construction and maintenance without dipping into general funds.7Federal Highway Administration. Table SF-3B – Highway Statistics 2022 – Receipts of State-Administered Toll Road and Crossing Facilities Court fines and administrative penalties round out the picture, offsetting some costs of running the judicial and correctional systems.
Who Actually Bears the Burden
The absence of an income tax doesn’t mean low taxes for everyone. It shifts the burden from earnings to spending, property, and consumption, and that shift hits lower-income households hardest. A family spending nearly all of its income on taxable goods and housing effectively pays a higher percentage of its earnings in state and local taxes than a wealthier family that saves or invests a large portion.
Research from the Institute on Taxation and Economic Policy illustrates the gap. The bottom 20 percent of earners in Texas pay roughly 12.8 percent of their income in state and local taxes, and in Florida the figure reaches about 13.2 percent. In California, which has a steeply progressive income tax, the bottom 20 percent pay around 11.7 percent. The no-income-tax states look like low-tax paradises from the top of the income ladder but often impose a heavier effective burden on those at the bottom.
This is the core trade-off. No-income-tax states attract high earners, retirees, and businesses with the promise of keeping more of their income. But the revenue has to come from somewhere, and that somewhere is a collection of taxes that don’t scale with ability to pay. Whether the trade-off works for you depends on your income level, your spending habits, and how much property you own.
Two Things to Know Before Moving for the Tax Break
The nine no-income-tax states are not interchangeable. Washington stands alone among them in imposing a state-level estate tax. The exemption threshold for 2026 is $3,076,000, and rates climb as high as 35 percent on the largest estates, the highest top rate of any state in the country. The other eight impose neither an estate tax nor an inheritance tax, which makes them notably different for wealth transfer planning. Someone who relocates to Washington specifically to avoid income tax may not realize they’re moving into the state with the most aggressive estate tax in the nation.
The second issue is residency. Buying property or renting an apartment in a no-income-tax state isn’t enough to escape your former state’s tax reach. States with income taxes aggressively audit residents who claim to have moved, looking at where you actually spend your time and where your life is centered. Residency audits evaluate a web of factors: where your driver’s license is issued, where you’re registered to vote, where your doctors and accountants are located, where your kids attend school, and where you spend the majority of your nights.
The legal concept that matters is domicile, which requires both physical presence in the new state and a genuine intent to make it your permanent home. Changing your mailing address isn’t enough. Auditors look at the totality of your connections to each state and determine which one you’re most closely tied to during each tax year. People who split time between a high-tax state and a no-income-tax state are the most common audit targets. If you’re making the move to save on taxes, sever as many connections as possible with your former state: sell or lease out your old home, move your bank accounts, update every form of identification, and establish new professional relationships in your new state. Losing a residency audit means owing back taxes, interest, and penalties to the state you thought you’d left behind.