The cashier drags a can of corn across the scanner. Then a pack of toilet paper and a toy car (the bribe to get Junior to be on his best behavior). With each beep, you eye the growing total on the register readout—$3.12, $9.23, $10.25, $12.20. Hey, you’re living on a budget and have to keep a close eye on your expenses!
The subtotal grows, and just when you think you’ve nailed your budget, the cashier smacks the total key. Taxes! And just like that, your budget is busted.
You might think, Wouldn’t it be great to live in a state with no sales tax? If I didn’t have to pay sales tax, I’d save so much money.
Well, if that’s your dream, you can choose from five states that don’t have sales tax: Alaska, Delaware, Montana, New Hampshire and Oregon. But before you pack your suitcase, let’s take a look at how these states tax their residents.
States With No Sales Tax
Just because Alaska, Delaware, Montana, New Hampshire and Oregon don’t have a state sales tax, that doesn’t mean they’re tax-free utopias. These states still collect taxes to fund their governments. All but Alaska have a state income tax, and don’t forget about property taxes. So, the moral of the story: You can never escape taxes.
Known as The Last Frontier, Alaska is the only state that doesn’t collect sales tax or income tax. That’s right—zero! And if you look at Alaska’s overall tax burden, it’s the lowest of all 50 states.1 Sounds perfect, right? Well, let’s dig a little deeper.
Taxes shouldn’t be this complicated. Connect with a RamseyTrusted tax advisor.
You might not escape sales tax if you move to Alaska because cities are allowed to collect local sales tax. Typical rates range from 2% to 5%.2 But Alaska’s largest city, Anchorage, does not collect sales tax. Fun fact: Anchorage’s population is 291,000, which is nine times larger than Fairbanks, Alaska’s second-largest city, which also doesn’t collect sales tax.3
So how does a giant state like Alaska operate without typical tax revenue? Well, the answer is oil. Black gold. Texas tea. (Cue The Beverly Hillbillies theme song.) State and local governments earn $3.1 billion per year in royalties and taxes from the oil and gas industry.4
Delaware makes up for not having a state sales tax by having a state income tax that tops out at 6.6% for incomes above $60,000.5 In case you’re wondering, that’s definitely on the high side. So, you’ll save money in the checkout line, but your paycheck will be lower. The First State’s tax burden ranks 18th.6
You won’t pay sales tax in Big Sky Country, but you’ll be hit with a 6.75% state income tax.7 Several smaller Montana cities that are popular with tourists also charge a 3% resort tax on lodging and dining. Some of these cities include: Whitefish, West Yellowstone and Wolf Creek.8 Overall, Montana’s tax burden ranks 21st.9
New Hampshire’s motto is “Live Free or Die,” and if you equate death with taxes, it makes sense that New Hampshire doesn’t have sales tax or state income tax. New Hampshire does charge a 5% tax on dividend and interest income.10 And if you’re eating out in New Hampshire, be prepared for a 8.5% tax on meals.11 New Hampshire’s property taxes (1.86%) are the third highest in the nation.12 But the state’s overall tax burden is on the lower side, coming in at 28th.13
Not paying sales tax really loses its luster when you look at Oregon. It has one of the highest state income taxes in the country: 8.75% for incomes above $50,000 and 9.9% for single incomes above $125,000.14 That’s a big chunk of your paycheck. Because of this, Oregon has the 11th highest tax burden.15
Which States Have the Highest Sales Tax?
About 97% of Americans live in one of the 45 states with a sales tax.16 And of those five states without sales tax, four place in the top 10 for lowest populations.17 Oregon is the only state with a moderate-sized population.
Okay, so which states really sock it to you in the checkout line? If you guessed California, you’re right! California’s state sales tax is 7.25%, but you also have to add the local sales tax rate, which varies from city to city.18
Thirty-eight states charge a combination of state and local sales taxes.19 So, if you factor in the average local sales tax rate, the highest five states are: Louisiana (9.55%), Tennessee (9.55%), Arkansas (9.48%), Washington (9.29%) and Alabama (9.22%).20
But as we’ve seen above, low or high sales taxes don’t always mean you have a low or high tax burden. For instance, Tennessee has the highest average sales tax, but it is one of nine states that don’t have a state income tax. Tennessee’s tax burden ranks 48th, just a little bit higher than Alaska.23
How to Avoid Paying More Taxes Than You Need To
Moving to a state with a lower tax burden isn’t an option for many of us. So, if that’s you, there are some ways to lower your sales tax.
One silver lining with a sales tax is that you can avoid paying it by not buying stuff. Hey, we all have needs (toilet paper) and wants (more toilet paper), but money you don’t spend (i.e., savings) is not subject to sales tax. On the other hand, you can’t avoid income taxes. Well, you can . . . but you can also be charged with tax evasion.
But with the U.S. experiencing inflation at levels it hasn’t seen in 40 years, cutting your spending (and your sales tax) might be easier said than done. But don’t lose hope. The extra time and effort it takes to create a budget that works for you will be worth it in the long run.
Work With a Tax Pro
Is your tax burden feeling extra heavy? An Endorsed Local Provider (ELP) can make sure you aren’t overpaying or underpaying your taxes! Plus, they’re RamseyTrusted—so you know they’ll serve you well.