States use many types of taxes and fees to raise money, such as the income tax and sales tax. It might appear that the cost of living is lower in a state with no income tax. In reality, other taxes, such as sales and fuel taxes, could cost a resident more than if they lived in a state that did have a state income tax but also had significantly lower sales and fuel tax.
State Income Tax
An important consideration for residents with a high income, several states have no state income tax. As of 2011, those states are Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. New Hampshire and Tennessee have a state income tax but it only taxes dividends and interest income. Twenty-seven states, including the District of Columbia, do not tax Social Security benefits. They are Alabama, Arizona, Arkansas, California, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Virginia and Wisconsin.
State Sales Tax
Sales tax rates are important for residents who do a lot of spending. A lower tax rate means that meals eaten out, clothing purchases and even car purchases will cost less. While several states don't charge any sales tax, towns, cities and counties might levy a local sales tax. The only states that have no sales tax are Alaska, Delaware, Montana, New Hampshire and Oregon. Some states exempt specific items from sales tax. For instance, Pennsylvania charges no sales tax on clothing.
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Fuel tax is one factor that determines the price of gasoline within a state. Alaska adds the lowest fuel tax, with the states of Alabama, Arizona, Georgia, Louisiana, Missouri, New Jersey, New Mexico, Oklahoma, South Carolina, Texas, Virginia and Wyoming adding less than the remaining 37 states.
Some states use excise taxes to raise money. The highest excise tax on tobacco products is in New York, followed by Rhode Island, Washington, Connecticut, New Jersey, Wisconsin, Massachusetts, District of Columbia and Vermont, as of 2011. Other states that charge excise tax on tobacco are Alaska, Arizona, Connecticut, Maine, Maryland and Michigan.
North Dakota and Oregon are tax-friendly states to reside in if you have a lot of health-care expenses. While federal income tax allows a medical deduction in excess of 7.5 percent over your adjusted gross income, North Dakota and Oregon allow all health care expenses to be deducted on state income taxes.
Federal Income Tax Deduction
Nine states have state income taxes that allow taxpayers to deduct all or part of their federal income tax payment. They are Alabama, Iowa, Louisiana, Missouri, Montana, North Dakota, Oklahoma, Oregon and Utah, a factor to be considered if comparing the costs of living between states with similar state income tax rates.
In general, Alaska has the lowest state tax burden. It even pays its residents to live there. The 2009 payment was $1,305 for every person, including children, who lived in the state for at least a year. Wyoming offers low property taxes because of the money the state collects from mineral and oil companies. While Michigan has an income tax, it will be declining, by 2015, to 3.9 percent. Pennsylvania is one of the states that not only does not tax Social Security but also does not tax income from pensions, 401(ks)s or other types of retirement accounts. Colorado has a low flat income tax rate. As residents age, levels rise at which Social Security and retirement income can be excluded from state income tax.