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Why do Some States Have a Sales Tax and Others Don’t?



Question: Ever since the pandemic started, not only have I been working at home, but my boss has made it a permanent thing. So now I can live anywhere and get paid. I want to move out of California, which has the nation’s highest income tax. But I’ve also found several states that charge no SALES tax. That sounds awesome, but I’m wondering how they can do that – and how much I’ll save if I move to one of those states. What do you think?

Stephen in San Diego

Howard Dvorkin, CPA and chairman responds…

I like this question because I live in Florida, which is one of seven states that charge no income taxes. The others are Alaska, Nevada, South Dakota, Texas, Washington, and Wyoming.

Only five states charge no sales tax: Alaska, Delaware, Montana, New Hampshire, and Oregon.

As you can see, Alaska is the only state without an income and sales tax. This means if Stephen really wants to save on his taxes, he’ll need to move 3,600 miles north – and dress warmly.

He also needs to be careful about what city he chooses in Alaska. While the state doesn’t charge sales tax, the state capital of Juneau does. It’s 5 percent. Other big Alaskan cities like Fairbanks or Anchorage charge none. Some smaller municipalities do.

This wide range of taxes can be confusing. Stephen isn’t the only American who wonders how these United States can be so different when it comes to taxes. Let’s take a closer look.

Sales tax is a sneaky tax

Stephen lives in California, which charges the highest sales tax in the nation: 7.25 percent. But even those states that tout no sales tax still find ways to get you. New Hampshire? You’ll pay 9 percent on meals prepared in restaurants and on rental cars. Montana? If you go camping, you’ll pay a “lodging and usage tax” of up to 7 percent.

Sales taxes are different from income taxes in one big way: While most states and the federal government charge income taxes, the federal government is totally out of the sales tax game. What this means: State governments hew pretty closely to the standards set in federal income taxes. There’s less variety in the rules because it’s just easier to tweak rules that already exist.

Sales taxes, on the other hand, are the Wild West of taxes. Without any federal guidance, state sales taxes change on a dime, cost you many dollars, and require deep dives into mundane details to figure them all out. For example, Arizona has something called “transaction privilege tax,” Florida has a “discretionary sales surtax,” and Illinois has a “retailer’s occupation tax.”

Trust me, you don’t want me explaining all those right now. In fact, I have a theory: States make these sales taxes confusing on purpose because it’s easier to hide just how much they’re taking from us. It’s hard to lead a tax revolt if you don’t understand the taxes in the first place.

Taxes are only half the battle

Say Stephen moves to Alaska to get away from income and sales taxes. He’ll save a lot, but he’ll also spend a lot. That’s because, according to USA Today, Alaska’s cost of living is nearly 6 percent higher than the national average.[1] That’s the eighth-highest out of 50 states.

Of course, you might not want to live in Alaska. Or in Mississippi, which has the lowest cost of living in the nation. Then again, Mississippi is also, according to WalletHub, the least educated state, too.[2]

So what’s the conclusion here? States that charge the least in taxes might also offer the fewest services. You need to look at the whole picture – and not just sales taxes – when you choose the most economic and enjoyable place to live.


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