Texas has no state income tax, but does collect sales tax, property tax, and business taxes
Texas is one of nine states with no personal income tax. That means the state does not tax wages, salaries, investment income, or retirement withdrawals. However, Texas funds its government through other taxes: a statewide sales tax of 6.25 percent, local property taxes that vary by county and school district, and taxes on businesses and specific goods.
The absence of income tax does not mean Texas residents pay nothing to the state. Most people pay sales tax every time they buy something, and property owners pay annual property taxes. The mix of taxes you actually pay depends on where you live in Texas, what you buy, and whether you own property or a business.
Key Takeaways
- Texas has no state income tax on wages, salaries, investments, or retirement income.
- The state charges a 6.25 percent sales tax on most goods, and local areas add their own sales tax on top of that.
- Property owners pay annual property taxes to their county and school district, with rates varying significantly by location.
- Businesses pay franchise tax to Texas if they earn more than a certain threshold, even if they have no income tax liability.
Sales tax in Texas: what it covers and where it applies
Texas sales tax is 6.25 percent statewide, but most people pay more than that because cities and counties add their own local sales tax on top. Your total sales tax rate depends on your address. In some areas it reaches 8.25 percent or higher. You pay sales tax when you buy most goods at a store, online, or through a restaurant.
Groceries and prescription medications are exempt from sales tax in Texas. Clothing is also exempt. However, prepared food, restaurant meals, and non-prescription items are taxed. If you buy something online from a seller with a physical presence in Texas, you owe sales tax. If the seller has no Texas location, the rule depends on the seller's size and the current federal law, which has changed in recent years.
You can find your exact local sales tax rate by entering your zip code on the Texas Comptroller of Public Accounts website. The rate you see there is what you will pay at checkout.
Property tax: how it works and who pays it
Property tax is the largest source of tax revenue in Texas. If you own a home, land, or commercial property, you pay property tax to your county appraisal district and school district every year. The tax is based on the appraised value of your property, not the price you paid for it.
Property tax rates vary widely across Texas. A homestead in one county might be taxed at 0.6 percent of appraised value, while another county charges 1.2 percent or more. School districts, which are funded largely by property tax, set their own rates. You can find your property's appraised value and your tax rate through your county appraisal district's website.
Texas offers a homestead exemption that reduces the taxable value of your primary residence. The exemption typically lowers the value subject to school district tax by 20 percent, though the exact amount varies by school district. Homeowners over 65 and disabled homeowners may may have access to for additional exemptions. You must file for the homestead exemption with your appraisal district; it does not happen automatically.
Business taxes in Texas
Texas has no corporate income tax, but businesses do pay a franchise tax to the state. This tax applies to most businesses that earn more than $1.23 million in revenue per year. The rate is typically 0.375 percent of revenue, though some businesses pay a lower rate based on their structure.
Sole proprietors and partnerships with revenue under the threshold do not owe franchise tax. Retailers and wholesalers may may have access to for a lower rate. If you own a small business, you can check whether you owe franchise tax by reviewing your revenue against the current threshold on the Texas Comptroller website.
Businesses also pay sales tax on goods they purchase for resale, and they withhold income tax from employee paychecks to send to the federal government. Some businesses owe excise taxes on specific products like fuel or alcohol.
Other taxes you may encounter
Texas charges excise tax on gasoline, diesel, and cigarettes. The gas tax is currently 20 cents per gallon, and you pay it at the pump. Cigarette tax is $1.41 per pack. These taxes are built into the price you see.
If you own a vehicle, you pay registration fees to the state, though this is technically a fee rather than a tax. Some counties also charge a vehicle inspection fee. Rental car companies pay a tax on short-term rentals, which is sometimes passed to the customer as a surcharge.
If you inherit property or money in Texas, there is no state inheritance tax or estate tax. This is one area where Texas residents have a significant advantage compared to other states.
How Texas funds schools and services without income tax
Texas relies on sales tax, property tax, and business taxes to fund public schools, roads, courts, and state agencies. Property tax is the largest single source, funding schools and local government. Sales tax funds the state general fund, which pays for education, health services, and criminal justice.
This structure means Texas residents who own property or spend money in the state pay taxes, but those with no property and minimal spending have lower overall tax burden. Retirees living on investment income and no wages pay no state income tax, which is why some people move to Texas in retirement.
Frequently Asked Questions
Do I have to pay Texas income tax on my retirement income?
No. Texas has no state income tax on any source of income, including Social Security, pensions, 401(k) withdrawals, or investment gains. You still owe federal income tax on most retirement income, but Texas itself does not tax it.
What is the sales tax rate where I live?
Texas state sales tax is 6.25 percent, but your city and county add local sales tax on top. Your total rate depends on your zip code. Enter your address on the Texas Comptroller of Public Accounts website to see your exact rate.
Can I reduce my property tax bill?
If you own your home as your primary residence, you can file for a homestead exemption with your county appraisal district to reduce the taxable value. Homeowners over 65 and disabled homeowners may may have access to for additional exemptions. You must file; the exemption does not happen automatically.
Do I owe Texas franchise tax if I own a small business?
Only if your business earned more than $1.23 million in revenue during the year. If you are under that threshold, you owe no franchise tax to Texas. Check the Texas Comptroller website to confirm the current threshold and your business structure's rate.
Is there an inheritance tax in Texas?
No. Texas has no state inheritance tax or estate tax. If you inherit money or property, you owe no tax to Texas on the inheritance itself, though you may owe federal estate tax depending on the size of the estate.