Texas: No State Income Tax — But What About Other Taxes?

Texas is one of nine states with no state income tax. That's a significant financial benefit for residents, but it doesn't mean Texans pay no state taxes. The state makes up revenue through other mechanisms — particularly property taxes and sales taxes — and understanding the full picture helps you plan accurately.

No State Income Tax

Texas has no individual income tax and no corporate income tax. This applies to wages, salaries, business income, capital gains, dividends, interest, and retirement income — none of it is subject to Texas income tax. For high earners and business owners, this can represent substantial savings compared to states like California or New York.

Property Taxes

Texas has some of the highest effective property tax rates in the country, averaging around 1.6-1.8% of assessed value annually in many counties. Property is assessed by the local appraisal district, and rates vary by county, city, school district, and other taxing entities. Homeowners can apply for a homestead exemption that reduces the taxable value of their primary residence.

Sales Tax

The Texas state sales tax rate is 6.25%. Local jurisdictions (cities, counties, transit authorities, special districts) can add up to 2% more, bringing the maximum combined rate to 8.25%. Most tangible personal property is subject to sales tax; groceries and prescription drugs are exempt.

Franchise Tax

Texas imposes a franchise tax on businesses (not individuals). It's technically a gross receipts-based tax, not an income tax. Most small businesses fall under the no-tax-due threshold. Businesses above the threshold pay a rate on total revenue minus deductions for either cost of goods sold or compensation.

Federal Return Considerations

Because you can only deduct state and local taxes (SALT) up to $10,000 on your federal return, and Texas residents have no state income tax to deduct, property taxes become the primary SALT deduction for Texans. High property taxes in Texas may bring residents close to or over the $10,000 federal cap on their own.

Moving to Texas

People moving from high-income-tax states to Texas need to establish Texas domicile clearly and promptly. States like California and New York have been known to pursue former residents they believe maintained enough ties to their original state. Document your move thoroughly — voter registration, driver's license, bank accounts, and primary residence all establish domicile.