Many Americans looking to increase their savings might consider relocating to one of the nine states that impose no income tax on their residents: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. However, while these states offer a reprieve from income taxes, this doesn't necessarily translate into overall savings. In fact, the cost of living in these areas is rising rapidly, particularly evident in home prices. According to economist Hannah Jones, nationwide data from Realtor.com® reveals a staggering 46.6% average increase in home list prices from May 2019 to May 2024.

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Interestingly, two-thirds of the states without income tax experienced even higher price growth. Wyoming saw the most substantial rise at 82.0%, followed by New Hampshire (+76.5%), South Dakota (+65.0%), and Tennessee (+52.7%) over the past five years. Despite some states like Texas (+26.7%), Washington (+35.6%), and Florida (+36.4%) showing slower home price increases compared to the national average, residents still face significant financial challenges. For instance, Texas and Florida have witnessed skyrocketing home insurance costs due to heightened risks from climate-related events. Moreover, many no-income-tax states compensate for lost revenue through steep sales taxes or elevated property insurance premiums, nullifying the perceived tax advantages.

This chart shows New Jersey, a state with income tax, outpacing every state except California in terms of home value appreciation during Q1 2024:

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According to Realtor.com senior economist Ralph McLaughlin, the affordability of states without income taxes may be overestimated for several reasons. Wealthier households often relocate to these states to avoid income taxes, thereby driving up property prices. Additionally, the absence of income tax necessitates higher property and sales taxes to sustain public services, further burdening residents financially.

The escalation in home prices within these low-tax states can be attributed to a combination of factors, notably increased demand fueled by migration from high-tax states like California, Illinois, and New York. This surge in demand, however, is met with limited housing supply, intensifying property values and subsequently property taxes. Despite the absence of income tax, state governments still require revenue to fund essential services such as education and infrastructure, prompting the imposition of other taxes that reduce disposable income.

Moreover, extreme weather events have exacerbated financial pressures in some no-income-tax states. For instance, Florida has seen rising insurance costs due to frequent hurricanes and storms, posing additional economic challenges for residents.

In essence, while low-tax states initially appear attractive for savings, the reality of rising living expenses, particularly in housing and insurance, diminishes their economic appeal.

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