You’ve probably seen those flashy headlines about people fleeing to Florida or Texas to escape the taxman. It’s a compelling narrative. The idea that you can just pack a U-Haul, cross a state line, and suddenly keep a massive chunk of your paycheck is intoxicating. But honestly, the reality of states that have a state income tax is a lot messier than a simple "move here, save money" equation. Taxes aren’t just a flat fee you pay for the privilege of existing in a specific geography; they’re the price of admission for infrastructure, schools, and services.
Most people look at a map and see 41 states (plus D.C.) that take a bite out of their income and nine that don't. That’s the surface level. If you stop there, you’re missing the forest for the trees.
I’ve spent years looking at how state revenue departments like the California Franchise Tax Board or the New York Department of Taxation and Finance operate. They aren't just faceless entities. They are massive machines that determine the quality of the roads you drive on and the safety of the bridges you cross. When we talk about states that have a state income tax, we’re talking about a spectrum that ranges from "barely noticeable" to "wait, did I just pay for a small country’s military?"
The Progressive vs. Flat Tax Divide
It’s not just about if a state taxes you, but how.
California is the poster child for the progressive system. It’s aggressive. If you’re a high earner there, you’re looking at a top bracket of 13.3%, which includes the Mental Health Services Act tax. That’s the highest in the nation. It’s designed to redistribute wealth, basically. New Jersey and New York follow similar paths, with top rates that can make a six-figure earner wince every April.
Then you have the flat-taxers.
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States like Illinois, Michigan, and North Carolina don’t care if you make $50,000 or $5,000,000. Everyone pays the same percentage. There’s a certain "fairness" to it on paper, but critics often argue it hits lower-income families harder because that 4% or 5% represents a much larger portion of their "survival money" than it does for a billionaire.
A shift is happening
Lately, we’ve seen a weird trend. Republican-led legislatures in states that have a state income tax are racing to flatten their systems. Iowa is a prime example. They are moving toward a flat tax of 3.8% by 2026. It’s a deliberate strategy to compete with the "no-tax" states. They’re betting that a lower, simpler tax code will lure businesses away from the high-tax coasts. Does it work? The jury is still out, honestly. Economic growth depends on a lot more than just the tax rate—you need a skilled workforce and decent weather helps too.
Why "No Income Tax" Can Be a Total Illusion
Let’s get real for a second. Governments need money. If they don’t get it from your paycheck, they’ll get it from your house, your car, or your morning coffee.
Take Texas or New Hampshire. No state income tax, right? Great. But check your property tax bill. In many parts of Texas, property taxes are astronomical compared to the national average. You might save $5,000 in income tax but end up paying that exact same amount—or more—to the local school district via your mortgage escrow.
New Hampshire is even quirkier. They don't tax earned income (wages), but for a long time, they taxed interest and dividends. They are phasing that out, but their property taxes remain some of the highest in the U.S.
Then there’s Tennessee. They used to have the "Hall Income Tax" on investment income, but that’s gone now. To make up for it? They have some of the highest combined state and local sales tax rates in the country. You pay more every time you buy a pair of shoes or a lawnmower. Basically, the "tax burden" is a shell game. You have to look at the total cost of living, not just the income tax line item.
The Complexity of Remote Work and "Nexus"
The world changed after 2020, and the tax departments in states that have a state income tax haven't quite caught up in a way that makes sense to humans.
If you live in a "no-tax" state like Florida but work remotely for a company in New York, you might think you’re in the clear. Wrong. New York is one of the "convenience of the employer" states. They will fight you for every penny. If your employer is based in Manhattan and you’re working from your couch in Miami for your own convenience (rather than because the company needs you in Florida), New York expects you to pay New York state income tax.
It’s a nightmare.
I’ve talked to people who ended up owing taxes in two different states because they didn't track their days correctly. If you spend 183 days in a state, many jurisdictions consider you a "statutory resident." They want their cut. This is why professional athletes have "jock taxes." Every time a Lakers player plays a game in Chicago, they owe Illinois a portion of their game-day salary.
It’s absurdly granular.
States That Take a Middle Road
Not every state is trying to be California or Florida. There’s a massive middle ground.
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- Pennsylvania: They have a flat tax of 3.07%. It’s relatively low and predictable.
- Indiana: Another flat tax state, currently sitting at 3.05%.
- Arizona: Recently moved to a flat tax of 2.5% to stay competitive in the Southwest.
These states are trying to find a "sweet spot." They want enough revenue to keep the lights on without scaring away the middle class. When you’re looking at states that have a state income tax, these "low-flat" states often offer the best balance of services versus cost. You get functional roads and decent state parks, but you aren't losing 10% of your bonus to the capital.
The Weird Outliers and Specific Exemptions
Tax law is rarely logical. It's built on decades of political compromises and lobbying.
In some states, your Social Security benefits are fully taxed. In others, they are completely exempt. If you’re a retiree, moving from a state that taxes your pension to one that doesn't is a massive "raise" without you doing a lick of work.
- Military Pay: Many states, even those with high income taxes, offer exemptions for active-duty military pay.
- Education Credits: States like 529 plan contributions can sometimes be deducted from your state income, which is a nice perk if you’re saving for your kid’s college.
You also have to consider local income taxes. Most people forget about these. If you live in Philadelphia, you’re paying a city wage tax on top of the Pennsylvania state tax. In Ohio, almost every municipality has its own income tax. You could be living in one town, working in another, and filing three different returns just for your local earnings. It’s enough to make anyone want to move to a cabin in the woods in Wyoming.
Is Living in a High-Tax State Ever Worth It?
This is the million-dollar question. If California and New York are so "punitive," why are they still economic powerhouses?
The truth is that states that have a state income tax—specifically high ones—often offer things you can't get elsewhere.
- Access to High-Paying Jobs: The tech hubs in Silicon Valley or the financial centers in NYC pay so much more than average that even after a 10% state tax, you still take home more than you would in a low-tax rural area.
- Public Infrastructure: Better public transit, world-class research universities, and specialized healthcare facilities.
- Social Safety Nets: High-tax states generally provide more robust unemployment benefits, paid family leave, and state-subsidized healthcare.
For some, it’s a bad trade. For others, it’s just the cost of doing business in a place where opportunity is everywhere.
How to Actually Compare Your Options
If you’re thinking about moving because of taxes, don't just look at the brackets. That’s a rookie mistake. You need to do a "Tax Burden Analysis."
First, calculate your projected state income tax based on your specific salary. Don't use "averages." If you’re a high earner, a progressive system hurts more. If you’re middle-class, a flat tax might be worse.
Second, look at property tax rates and the assessed value of homes. A 1% tax on a $1 million home is the same as a 2% tax on a $500,000 home.
Third, check the sales tax. If you’re a big spender, a 9% or 10% sales tax (common in parts of the South and West) adds up incredibly fast.
Finally, look at the specific exemptions. Are you a veteran? Do you have a lot of capital gains? Do you own a small business? Every state treats these things differently.
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Actionable Next Steps
Don’t make a life-altering move based on a map you saw on a "Top 10" list.
- Download the actual tax forms: Go to the Department of Revenue website for the state you're eyeing. Look at the "Resident" tax return (usually a Form 1040 equivalent). See what the deductions look like.
- Use a Total Tax Burden Calculator: Sites like the Tax Foundation offer data that combines income, sales, and property taxes into one percentage. This is the only number that actually matters for your wallet.
- Consult a "Multi-State" CPA: If you work remotely or own property in multiple states, a standard tax preparer might miss the "nexus" issues. You need someone who understands how these states fight over your income.
- Audit your lifestyle: If you don't use public services, hate the city, and want a huge plot of land, a "no-tax" state with high property taxes might actually be the worst choice for you.
The reality of states that have a state income tax is that they are all competing for you. Some compete on price, others compete on quality. Your job is to figure out which "product" you’re actually buying when you sign that lease or mortgage. Taxes are inevitable, but being surprised by them shouldn't be.