State income tax is typically based on the taxable income or adjusted gross income reported on the taxpayer's annual federal income tax return.
Not Always Cheaper to Live There
The fact that a state does not have an income tax does not necessarily mean that its residents pay less in taxes than residents of states with an income tax. All states must generate revenue and they do so through various taxes including income taxes, sales taxes, property taxes, license taxes, fuel taxes, and estate and inheritance taxes, just to name a few. In states without state income tax, higher sales, property and other assorted taxes can exceed the annual cost of a state income tax.
For example, all states except Alaska, Delaware, Montana, New Hampshire and Oregon currently charge sales tax. Food, clothing and prescription drugs are exempt from sales tax in most states.
In addition to states; cities, counties, school districts and other jurisdictions impose real estate and sales taxes. For cities that do not sell their own utilities, like electricity and water, these taxes represent their main source of revenue.
Still, it is worth noting that during 2006 and 2007, the seven states with no income tax whatsoever, Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming, led the nation in net population growth.