During the COVID-19 pandemic, millions of Americans have packed up and moved — in search of sunshine, freedom and, let’s face it, a lower tax bill. On the run from New York to Florida and from California to Texas, one thing has become clear over the past five years. People decide where to live in part to minimize their tax bill.
When it comes to state income taxes, the disparities in America are striking and often political. The practical question is: should all fifty states abolish the income tax altogether? Can states afford to eliminate taxes altogether? How do some states fare when other states impose double-digit taxes?
Let’s dig deeper, not as a utopian fantasy, but as a serious look at how zero-tax states work, why people flock there, and why many blue states don’t even want to touch the idea.
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Why some states have zero income taxes and others don’t
As of 2025, there are nine states that do not impose a general income tax on wages and earned income: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. Technically, New Hampshire taxed interest and dividends until 2025, but it repealed that tax as of January 1, making it more of a “no income tax” state across the board.
Why can these states do it without collecting income taxes? This is usually because they rely heavily on alternative sources of income:
- Sales tax and excise duties. Many of these states impose higher sales taxes or excise taxes (on fuel, cigarettes, etc.) to close the revenue gap.
- Property taxes. Local property taxes often bear a larger share of the burden, especially in states without income taxes. However, states like New Jersey still rank among the highest in income taxes and property taxes, so it is not universally true that high income taxes will lead to lower property taxes.
- Income from natural resources or severance taxes. Alaska is a standout: the country has no income tax and relies heavily on oil and gas revenues (severance taxes, royalties) and federal subsidies to close the tax gap.
- Expenditure and service adjustments. These states tend to adopt a leaner (or at least more limited) governance model in areas such as social services, pensions, and civil servant salaries.
Unable to extract additional money from paychecks, zero-tax states must be disciplined in their budgets and accountable to their priorities.
Why some states charge 10% or more income taxes
At the other extreme, several states have very high marginal income tax rates. For example:
- California comes to 13.3%.
- New York imposes a top rate of approximately 10.9%.
- Hawaii amounts to about 11% for high incomes.
These rates exist because these states require a certain scale of public services (transportation, housing subsidies, social services, public universities, Medicaid expansions) and they believe in progressive taxes to finance them. The logic is: the more you earn, the more you contribute. This means that between the highest federal tax rates and state income tax rates, the top earners work for the government more than six months per year.
But there is a tipping point. As soon as high earners migrate or companies move, the tax base shrinks. That’s why many states are flirting with caps, deductions or flat tax proposals, in an effort to balance revenue needs and competitiveness.
How a zero-income tax state actually functions – the tradeoffs
Zero income tax sounds glamorous, but there are downsides to it.
- Dependence on volatile income streams. Sales and excise taxes generally fluctuate with the economy. During recessions, tax collections decline. States must maintain surpluses or reserves to buffer downturns.
- Heavier burdens on consumption and property. Lower-income households typically spend a greater share of their income, so in some cases high sales taxes can be regressive. Although I would rather have a consumption tax than an income tax any day.
- Limited scope of government. To balance budgets, some states may underfund education, infrastructure or health care programs compared to what blue states could provide.
- Sensitivity of mobility. These states can attract capital, retirees and businesses, which is exactly why many states compete by cutting income taxes or creating tax exemptions.
- Political restrictions. Once a state gets used to income tax revenue, it is difficult to repeal. That’s why no state has completely eliminated its income tax on wages in 45 years, although some states (Mississippi and Kentucky, for example) are moving toward reductions.
Why blue states tend to be heavier
When you look at ‘blue’ states versus ‘red’ states, patterns emerge:
- Higher tax burden overall. On average, blue states levy more income, sales, and property taxes (as a percentage of income) than red states.
- Progressive systems. Many blue states use steep marginal brackets to finance ambitious social programs that often fail miserably.
- Greater expectations about government spending. Voters in blue states often demand expanded social safety nets, public transportation, housing programs and environmental regulations, all of which cost money.
- Regulatory costs and higher costs of living add to the burden. Blue states tend to have higher housing costs, stricter land use regulations, and more regulations, which indirectly raise taxes. One study found that the average blue state was 13% more expensive than the average red state, while housing costs were 52% higher.
- Out-migration pressure. Blue states with high taxes lose taxpayers to red states with lower taxes or states with zero income taxes, which are much tougher on illegal immigration and sanctuary cities.
Simply put, the more a state leans blue, the more it leans toward taxing income to support a more expansionary government.
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Should every state abolish income taxes?
In principle, a world without income taxes is attractive to fiscal conservatives and mobile capital. But the reality for most states is harsher. Many rely on income taxes as the stable backbone of their revenue structure. Eliminating it would mean painful budget cuts or huge increases in sales and property taxes.
For a few states with unique advantages and wealth in natural resources (such as Alaska), booming tourism (Florida), or aggressive growth (Texas and Nevada), the no-income tax model is feasible. But for states with dense populations, expensive infrastructure needs, or large social service obligations, it will be a very difficult leap.
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While it is not practical for all fifty states to eliminate income taxes entirely today, we should push to flatten and lower top rates and make states more financially competitive. Red states have paved the way for a clear benefit with fewer job penalties, more incentives to stay and invest, and more freedom for taxpayers to decide how to distribute their dollars.
Going forward, states will continue to compete for talent. Blue argues that sticking to marginal interest rates of 10% or higher risks alienating their talent and their retirees and creating flight risks. Individual state capitalism will continue to bubble over the next decade and the taxes you pay will continue to be central as you decide where to work and live.
