Texas No Income Tax: What Taxes You Still Pay in TX

The Number That Changes Everything: $4,108

The Tax Foundation's 2026 state tax data shows the typical Texas homeowner pays $4,108 per year in property taxes — 13th highest in the nation. That number sets the stage for understanding the Texas tax equation. For a renter earning $75,000 in Texas, the income tax savings versus California ($6,750 saved at 9% effective state rate) are clear and substantial. For a homeowner with a $400,000 home in Plano paying $7,200/year in property taxes, the math is considerably more nuanced.

Texas made a deliberate constitutional trade-off: eliminate income tax, fund state and local government through property and consumption taxes instead. The 1993 amendment to Article VIII, Section 24 of the Texas Constitution created one of the most durable no-income-tax protections in the country — any attempt to create a state income tax requires approval by both two-thirds of the Legislature and a statewide voter referendum. No such referendum has ever passed or even come close to the ballot.

Understanding Texas taxes requires a complete picture: property, sales, franchise, motor vehicle, and the various fees and levies that substitute for income-based revenue. None of these individually approach what high-income taxpayers pay in California or New York state income taxes — but together, they form a meaningful burden that varies dramatically based on your income level, homeownership status, and spending patterns.

Texas Property Tax: The Real Trade-Off

Property tax is the primary mechanism Texas uses to fund public schools, county roads, emergency services, and municipal government — the functions that income tax covers in most states. Per the Texas Comptroller's Office 2025 Property Tax Report, Texas collects over $80 billion annually in property taxes, making it one of the largest property-tax-reliant states in the country.

The effective property tax rate in Texas — what homeowners actually pay as a percentage of market value — averages approximately 1.60% statewide according to the Tax Foundation, though rates vary meaningfully by county and taxing jurisdiction. A single property in Texas is typically subject to overlapping levies from the county, the school district (often the largest component), the city or municipality, and special districts for hospitals, community colleges, or flood control.

Sources: Texas Comptroller of Public Accounts 2025 Property Tax Report; Tax Foundation 2026 State-Local Tax Burden Rankings; county appraisal district data. Rates are effective rates applied to market value.

Texas Homestead Exemption: The Primary Tax Relief Mechanism

Texas offers a mandatory school tax Homestead Exemption of $100,000 for qualifying primary residences — a significant increase from the previous $40,000 floor, expanded under House Bill 2 in 2023. This exemption removes $100,000 from the assessed value used for school district taxes, which typically represent 50–60% of a Texas property tax bill. On a $400,000 home, the $100,000 exemption on the school portion saves approximately $1,200–$1,500 per year in Austin or Dallas.

Beyond the standard Homestead Exemption, Texas offers additional relief for qualifying taxpayers: homeowners age 65 and older receive an additional $10,000 school district exemption and a critical school tax freeze — their school district property taxes cannot increase as long as they remain in the home. Disabled veterans receive exemptions ranging from $5,000 to 100% of assessed value depending on disability rating. These provisions are filed with your county's Central Appraisal District (CAD) — they are not automatic.

Senate Bill 2 (2023) also capped annual appraisal increases on homestead properties at 10% per year — a protection that limits how quickly a rising real estate market can surge your tax bill. Non-homestead commercial and investment properties have no such cap, which is why real estate investors in Texas often face more volatile tax situations than owner-occupants.

Texas Sales Tax: 8.25% Maximum Combined Rate

Texas imposes a 6.25% state sales tax, with cities, counties, transit authorities, and special-purpose districts permitted to add up to 2.00% in local rates — bringing the maximum combined rate to 8.25%. Most major Texas metros operate at or near this 8.25% ceiling. Houston, Dallas, San Antonio, Austin, and Fort Worth all hit 8.25% for most retail transactions.

According to the Tax Foundation's 2026 State and Local Sales Tax Rates report, Texas's average combined rate of 8.20% ranks 10th highest in the country — above the national average of 7.0%. This matters because sales taxes are regressive: lower-income households spend a higher share of their income on taxable goods, meaning the effective sales tax burden as a percentage of income falls harder on lower earners.

The Institute on Taxation and Economic Policy (ITEP) calculates that the lowest-income 20% of Texas households pay approximately 7.2% of their income in sales taxes alone — far more than the 1.0% paid by the top 1% of earners, who save a far higher portion of their income. This distributional pattern is the central policy critique of income-tax-free states that rely on consumption taxes.

Notable sales tax exemptions in Texas include most groceries (unprepared food), prescription drugs, most agricultural inputs, and residential utilities. These carve-outs partially reduce the regressive burden. Texas does tax clothing, electronics, furniture, vehicles at purchase, and most services including select professional and personal services.

Texas Franchise Tax: The Business Income Proxy

Texas does not have a corporate income tax in the traditional sense — but it does have the Texas Franchise Tax, sometimes called the "margin tax," which functions as an annual revenue-based tax on most entities doing business in Texas. The franchise tax applies to corporations, LLCs, partnerships, and other business entities with revenues exceeding $2.47 million annually (2026 threshold, indexed for inflation).

The rate is 0.75% of taxable margin for most businesses and 0.375% for businesses that qualify as "retailers or wholesalers." Taxable margin is calculated as total revenue minus either cost of goods sold OR compensation — whichever deduction produces a lower tax bill. Sole proprietors and general partnerships owned by natural persons are exempt.

For small businesses earning under $2.47 million, the franchise tax is zero. For a Texas LLC earning $5 million with $2 million in COGS, the tax on $3 million margin at 0.75% equals $22,500. Texas requires annual franchise tax reports filed by May 15 with the Texas Comptroller. Use Form 05-158-A for the standard long form or Form 05-169 for the E-Z computation available to smaller filers.

Motor Vehicle Sales and Use Tax

Texas charges a 6.25% motor vehicle sales tax on new and used vehicle purchases — separate from the state sales tax and one of the higher vehicle tax rates in the country. On a $45,000 new vehicle, this generates a $2,812 one-time tax. Trade-in allowances are deductible, which reduces the taxable amount. The standard registration fees vary by vehicle weight and type, generally running $50–$150 annually.

For families that replace vehicles frequently, this 6.25% rate becomes a meaningful recurring cost. Compared to states like Oregon (no sales tax on vehicles) or Montana (also no vehicle sales tax), Texas's vehicle tax is a notable expense that most income-focused comparisons overlook.

The Complete Texas Tax Picture by Income Level

The Tax Foundation's 2026 state-local tax burden report places Texas's overall tax burden at approximately 8.6% of personal income — ranking roughly 20th–25th lowest among the 50 states. This is above middle for the nine no-income-tax states and below the 9.6% national average. But averages obscure the distributional story:

Source: Institute on Taxation and Economic Policy (ITEP) 2026 Who Pays? report; Tax Foundation; California Franchise Tax Board effective rate data. Comparisons exclude local income taxes (NYC adds ~3.88% for NYC residents). Individual results vary.

The takeaway is stark: the Texas tax structure is highly progressive in reverse — the lower your income, the higher your effective state and local tax rate. This is the direct mathematical consequence of replacing an income-based revenue system with property and consumption taxes. The top 1% of Texas earners pay roughly 4.6% of income in state and local taxes. The bottom quintile pays approximately 12.8%. The 2.7:1 ratio is one of the widest regressive spreads in the country.

For renters, this calculation shifts. If you rent rather than own, property taxes are incorporated into your rent but you receive none of the Homestead Exemption benefits. The income tax savings are still real, but the property-tax offset is passed along indirectly through housing costs rather than being deductible or adjustable.

Texas vs. Other No-Income-Tax States: A Direct Comparison

Texas is not the only option for income-tax-free living — and for many taxpayers, it is not the best option. Here is how Texas compares with the other eight no-income-tax states across the variables that matter most:

Source: Tax Foundation 2026 State Tax Competitiveness Index; WalletHub 2026 Tax Burden by State. Alaska and Washington omitted; see our states with no income tax guide for full breakdown.

For most income profiles, Wyoming and Florida represent better total-tax outcomes than Texas. Wyoming's 0.56% effective property tax rate is less than one-third of Texas's, making it dramatically cheaper for homeowners. Florida's 0.91% rate is nearly half Texas's. The reason Texas still attracts significant domestic migration — it ranked 2nd for net domestic migration in 2024 per U.S. Census Bureau estimates — is that it offers something the lower-property-tax states often can't match: large, economically vibrant metropolitan areas with developed job markets, infrastructure, and cultural amenities.

What Taxes Texas Does NOT Have

Beyond the absent income tax, Texas exempts several categories of taxes that other states impose:

• •No state estate tax: Texas imposes no state-level estate or inheritance tax. The federal estate tax applies at the federal level, but the $13.99 million federal exemption (2026) means most estates are not subject to federal estate tax either.
• •No inheritance tax: Beneficiaries who receive bequests in Texas owe nothing at the state level, regardless of relationship to the decedent.
• •No gift tax: Texas has no state gift tax. The federal annual gift exclusion ($19,000 per recipient in 2026) still applies.
• •No state capital gains tax: Because Texas has no income tax, long-term and short-term capital gains are entirely free of state tax. Federal capital gains rates still apply.
• •No personal property tax on vehicles: Unlike Virginia (where annual vehicle property taxes are thousands of dollars), Texas charges only registration fees — not an annual value-based personal property tax on cars.
• •No taxes on Social Security or retirement distributions: All retirement income — 401(k) distributions, IRA withdrawals, pension income, Social Security — is free of Texas state tax. Federal taxes still apply per IRS rules.

Relocation Reality: The Domicile Audit Risk

If you are relocating to Texas from California, New York, or Illinois to capture income tax savings, the tax savings are only realized if your former state acknowledges that you have genuinely left. California's Franchise Tax Board (FTB) and New York's Department of Taxation and Finance both conduct aggressive nonresident audits targeting high-income former residents who claim to have established Texas domicile.

A successful domicile change to Texas requires: (1) physically spending more days in Texas than California or New York — 183+ days minimum is the standard threshold, but courts and agencies have found domicile even without meeting this threshold if other connections remain strong; (2) Texas driver's license obtained; (3) voter registration transferred; (4) primary financial accounts and mail changed; (5) primary employment or business activity based in Texas. Passive investments in California real estate do not require ongoing California income tax filing unless those assets generate California-source income.

California audits can extend four years back and have resulted in significant back-tax assessments. New York audits are similarly aggressive. The burden of proof falls entirely on the taxpayer to demonstrate the move was genuine. See our guide to state tax comparisons for the full context on high-tax-state audit programs.

Case Study: A $150,000 Earner in Austin vs. Denver

Let's run the numbers for a software engineer earning $150,000 annually who owns a $550,000 home. Comparing Austin, TX to Denver, CO (4.40% state flat income tax, 0.55% effective property tax):

In this scenario, Austin and Denver produce nearly identical total state/local tax burdens ($12,485 vs. $12,325). Texas's income tax savings of $6,600 are almost entirely offset by its higher property tax bill. This example illustrates the core principle: for homeowners in expensive Texas metros, the no-income-tax benefit is not as large as the headlines suggest.

Increase that income to $300,000 with the same home, and Texas pulls ahead by roughly $7,000–$9,000 annually. Increase it to $600,000, and the Texas advantage exceeds $20,000 per year. The breakeven point for homeowners in high-value Texas markets versus moderate-income-tax states occurs around $200,000–$250,000 of annual income. Above that threshold, Texas wins; below it, the comparison is a toss-up or slight loss.

Use our income tax calculator to compare your federal and state tax picture across different scenarios.

Texas Property Tax Appeal: Your Recourse

If you believe your Texas property is over-assessed — a reasonable concern given the rapid appreciation in Austin, Dallas, and other metros — you have a formal appeals process through your county Central Appraisal District (CAD). Texas has one of the more accessible property tax protest systems in the country, and according to O'Connor & Associates, approximately 40–50% of formal Texas property tax protests result in a reduction.

Each year, CADs mail Notice of Appraised Value statements. Once received, you typically have until May 31 (or 30 days from the notice date, whichever is later) to file a protest. File using Form 50-132, Notice of Protest, available from your CAD's website. The protest process includes an informal review with a CAD appraiser and, if unresolved, a formal hearing before the Appraisal Review Board (ARB). You can present comparable sales data, an independent appraisal, or evidence of factual errors to support your case. Learn more about the property tax landscape across all states.

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