Five states do not impose a statewide sales tax, but local taxes and exceptions can still affect your cost of living-especially for retirees considering relocation and everyday expenses
For retirees and anyone planning a move, understanding how state and local taxes affect daily expenses is critical. While some states advertise themselves as sales tax-free, the reality is more nuanced. According to the Tax Foundation, only five states-Alaska, Delaware, Montana, New Hampshire, and Oregon-do not levy a statewide sales tax. Yet, even in these states, local taxes and special rules can still impact what you pay at the register.
Sales tax is often overlooked in retirement planning, but it can have a significant effect on household budgets, especially for those living on fixed incomes. The way states tax groceries, prescription drugs, and other essentials varies widely, and these differences can add up to hundreds of dollars a year in extra costs or savings.
Where Sales Tax Is Truly Absent
Delaware and Oregon stand out as the only states where neither the state nor local governments impose any sales tax on consumers. In these states, shoppers pay the sticker price without additional tax at checkout, making them unique among U.S. jurisdictions. For retirees or anyone with a tight budget, this can simplify cost-of-living calculations and reduce the risk of surprise expenses.
In contrast, Alaska, Montana, and New Hampshire each have important exceptions. Alaska does not collect a statewide sales tax, but local governments can impose their own, with rates averaging 1.82% and reaching as high as 7.85% in some areas. Montana generally avoids both state and local sales taxes, but certain resort communities-including Big Sky, West Yellowstone, Whitefish, and Red Lodge-charge up to 3% on lodging, food, alcohol, and other tourist-focused goods and services. New Hampshire exempts most retail purchases but applies an 8.5% tax on restaurant meals, room rentals, and motor vehicle rentals.
Grocery Taxes and Essential Exemptions
For many retirees, the tax treatment of groceries is a key factor in everyday spending. Most states exempt groceries from sales tax entirely, but a handful still tax them at the full rate. Idaho (6%) and South Dakota (4.2%, set to revert to 4.5% in July 2027) are among the states that fully tax groceries. Others, such as Mississippi (5%), Tennessee (4%), Alabama (2%), Utah (3%), and Missouri (1.225%), apply a reduced rate. Even in states that exempt groceries at the state level, local jurisdictions may still add their own taxes, so the total cost can vary by city or county.
Prescription drugs are exempt from sales tax in every state except Illinois, while over-the-counter medications are taxable in most states but exempt in some. Clothing is another category with mixed treatment: several states exempt it entirely, while others offer partial exemptions or tax it at the standard rate. These differences can have a meaningful impact on retirees, families, and anyone managing a fixed or limited income.
Balancing Sales Tax With Other State Taxes
While a lack of sales tax can make a state seem attractive, it is only one part of the overall tax picture. States without sales tax often compensate with higher property taxes, income taxes, or other fees. For example, New Hampshire has no sales tax but imposes relatively high property taxes, and some states tax retirement income more heavily than others. When evaluating a potential move, it is important to consider the full range of taxes and fees, as well as other living costs such as housing, healthcare, and insurance premiums.
According to the U.S. Census Bureau, state and local governments collected over $600 billion in general sales tax revenue in fiscal year 2023, accounting for roughly one-third of all state tax collections. This reliance on sales tax revenue means that states with no or low sales tax often make up the difference elsewhere, which can affect residents in less obvious ways.
Comparing Total Cost of Living
Choosing a state based solely on sales tax rates can be misleading. The total cost of living depends on a combination of taxes, housing prices, healthcare costs, insurance premiums, and everyday expenses. For retirees, the tax treatment of Social Security, pensions, and withdrawals from retirement accounts can be just as important as sales tax rates. Some states with no sales tax may tax retirement income more aggressively, while others offer exemptions or credits for seniors.
Understanding the interplay between different types of taxes is essential for making informed decisions about where to live in retirement. While sales tax can have a visible impact on daily purchases, hidden costs in property taxes, income taxes, and local fees can quickly offset any savings. Before relocating, it is wise to research not just state-level tax policies but also local rules and the broader economic environment. This approach helps ensure that the move delivers the expected financial benefits and supports long-term financial security.
