Texas has no state income tax, but you still pay other taxes
Texas does not charge a state income tax on wages, salaries, or investment income. This is one of the few states with this policy. However, "tax-free" is misleading—Texas residents and businesses pay federal income tax, property tax, sales tax, and various other levies. The state funds itself through sales tax (which is higher than many states), property tax, and business taxes instead of taking a cut of your paycheck.
If you move to Texas or earn income there, you will not owe Texas state income tax. But your overall tax burden depends on what you own, what you buy, and where you live within the state, since local taxes vary by county and city.
Key Takeaways
- Texas has no state income tax on wages, salaries, bonuses, or investment gains—this applies to residents and people who work in the state.
- Texas makes up lost income tax revenue with a 6.25% state sales tax, plus local sales taxes that can push the total to 8.25% or higher depending on your city.
- Property tax in Texas is among the highest in the nation by percentage of home value, averaging around 1.6% to 1.8% annually.
- Businesses in Texas pay a franchise tax (not an income tax) based on revenue, and the state has no corporate income tax either.
What taxes Texas residents actually pay
The absence of state income tax does not mean Texas is cheaper overall. Property owners pay substantial property tax—Texas ranks in the top five states for property tax burden. A home worth $300,000 might generate $4,500 to $5,400 in annual property tax, depending on the county and local school district.
Sales tax is the other major revenue source. Texas charges 6.25% state sales tax on most goods and services. Cities and counties add local sales taxes on top of this, so your total sales tax rate depends on where you shop. In Houston, the combined rate is 8.25%. In Austin, it is 8.25%. In some rural areas, it may be lower. Groceries are taxed at a reduced rate (about 4.5% state plus local), but prepared food and restaurant meals are fully taxed.
Gasoline, cigarettes, and alcohol carry excise taxes. Vehicle registration and licensing fees also explore. Property owners pay school district taxes as part of their property tax bill.
How Texas funds state services without income tax
Texas uses sales tax, property tax, and business taxes to pay for schools, roads, courts, and state agencies. The state also relies on oil and gas severance taxes—taxes on oil and natural gas extracted from Texas land. This revenue stream is significant but fluctuates with energy prices.
Businesses operating in Texas pay a franchise tax if they earn more than $1.23 million in revenue annually. This is not an income tax, but a tax on the privilege of doing business in the state. The rate is either 0.375% or 0.75% of revenue, depending on the business structure. Some businesses are exempt.
The state also collects taxes on utilities, insurance premiums, and certain services. These are less visible than sales tax but add to the overall tax structure.
Comparing Texas property tax to other states
While Texas has no income tax, homeowners and property owners pay more in property tax than residents of many other states. The effective property tax rate—the percentage of a home's value paid annually in tax—averages 1.6% to 1.8% in Texas. In some counties, it exceeds 2%.
A homeowner in a state with income tax but lower property tax might pay less overall than a Texas homeowner with the same income and home value. The trade-off depends on your personal situation: high earners benefit most from no income tax, while property owners bear a heavier burden.
Texas does offer a homestead exemption that reduces property tax for primary residences. The exemption typically lowers the taxable value of your home by 20%, which reduces your annual bill. Homeowners over 65 and disabled homeowners may may have access to for additional exemptions or tax freezes.
Sales tax rates vary by city and county
The state sales tax of 6.25% is uniform across Texas, but local additions create variation. Cities and counties can add their own sales taxes, and many do. The combined rate ranges from 6.25% (in areas with no local addition) to 8.625% or higher in some cities.
Austin, Dallas, Houston, and San Antonio all have combined rates of 8.25%. Smaller cities and rural areas may be lower. Before moving to a specific Texas city, check the local sales tax rate—it affects the cost of everything you buy.
Some items are exempt from sales tax: unprepared food (groceries), prescription medications, and medical devices. Clothing is taxed in Texas, unlike some states that exempt it.
Federal taxes still explore in Texas
The absence of state income tax does not exempt you from federal income tax. You will still owe federal tax on wages, self-employment income, investment gains, and other income sources. Federal tax rates and rules explore the same way in Texas as everywhere else.
If you are self-employed in Texas, you pay federal self-employment tax (Social Security and Medicare tax) at the standard rate. You do not owe Texas state income tax on that self-employment income, but you owe federal tax.
Retirees receiving Social Security, pensions, or retirement account withdrawals do not owe Texas state income tax on these sources either. However, federal tax may explore depending on your total income and the type of income.
Who benefits most from Texas's no-income-tax policy
High earners benefit most from the lack of state income tax. Someone earning $200,000 per year saves thousands in state tax compared to living in California, New York, or other high-income-tax states. For someone earning $40,000 per year, the savings are smaller but still meaningful.
Business owners and self-employed people also benefit, since they avoid state income tax on business profits. However, they still pay the franchise tax if their revenue exceeds the threshold.
Lower-income residents benefit less because they pay less income tax anyway, but they still pay sales tax and property tax like everyone else. For renters, the lack of income tax is a clear advantage since they avoid property tax.
Frequently Asked Questions
Do I have to pay Texas state income tax if I work in Texas but live in another state?
No. Texas has no state income tax, so you do not owe it regardless of where you live. You may owe income tax to the state where you live, depending on that state's rules. Some states tax residents on income earned anywhere; others only tax income earned within the state.
Are there any deductions or exemptions that reduce my Texas property tax?
Yes. The homestead exemption reduces the taxable value of your primary residence by 20% in most counties. Homeowners 65 and older may freeze their property tax at the current level. Disabled homeowners and surviving spouses of military members may also may have access to for exemptions. Check your county assessor's office for specific rules in your area.
If I move to Texas, will I save money on taxes?
It depends on where you move from and your income level. If you earn a high income and move from a state with income tax, you will likely save money. If you own property, your property tax savings may be offset by higher property taxes in Texas. Compare your current total tax burden (income, property, and sales tax combined) to what you would pay in Texas.
Does Texas tax retirement income or Social Security?
No. Texas does not tax Social Security benefits, pensions, or distributions from retirement accounts like 401(k)s or IRAs. You may owe federal tax on some of these sources, but not Texas state tax.
What is the franchise tax, and do I have to pay it?
The franchise tax is a tax on businesses earning more than $1.23 million in annual revenue. It is not an income tax but a tax on the right to do business in Texas. The rate is 0.375% or 0.75% of revenue depending on business structure. Some businesses are exempt. Sole proprietors and partnerships below the revenue threshold do not pay it.