Texas Has No State Income Tax — Here’s What That Actually Costs You

Texas funds itself through a combination of sales tax, property tax (collected at the local level but driving school finance), federal funds, franchise tax on businesses, severance taxes on oil and gas extraction, and various excise taxes and fees. The Comptroller of Public Accounts publishes detailed revenue data every year, and the breakdown is roughly: sales and use tax 26%, federal funds 21%, motor vehicle sales and rental tax 9%, franchise tax 8%, oil production tax 6%, natural gas production tax 2%, cigarette and tobacco taxes 2%, alcohol taxes 1%, and the remainder from fees, licenses, lottery proceeds, and investment income.

The single biggest revenue source for state operations is the sales tax. At 6.25% state plus up to 2% local, Texas relies heavily on consumption to fund itself. This is why the sales tax base is broad: most goods are taxed, prepared food is taxed, and certain services like data processing and security services are taxed. Groceries and prescription drugs are exempt, which softens the regressive impact, but the overall structure still falls harder on middle-income households than on high-income households as a percentage of income.

Property tax is the other major source of public funding, but it’s collected at the local level by counties, school districts, cities, and special districts. The state doesn’t collect property tax directly. However, property tax funds the bulk of K-12 education through local school district levies, and the state’s school finance formula determines how much each district can collect and how much state aid it receives. This is why property tax reform has been a constant political issue in Texas: lowering property taxes requires either cutting school spending or increasing state funding from sales tax or other sources.

Federal funds account for over a fifth of the state budget, primarily through Medicaid matching funds, transportation grants, and education funding. This is consistent with most states, though Texas’s reliance on federal funds is slightly above the national average. Severance taxes on oil and gas production add another layer of revenue that fluctuates with energy prices. In high-price years like 2022, severance taxes can contribute $8-10 billion to the state budget. In low-price years, they can drop to $3-4 billion, which is part of why Texas maintains a substantial rainy day fund (the Economic Stabilization Fund) to smooth out budget cycles.

The franchise tax (margin tax) brings in $4-5 billion a year from businesses with revenue above the $2.65 million threshold. This is a meaningful contribution but small relative to sales tax. The franchise tax was designed in part to replace the old corporate franchise tax and to provide some balance against a tax system that otherwise leans entirely on consumption and property. For businesses operating in Texas, it functions like a low-rate entity-level tax on gross margin.

A common misconception is that Texas’s lack of income tax is offset entirely by higher property tax. The reality is more nuanced: Texas has higher property tax than the national average, similar sales tax rates to other states, no income tax, and a franchise tax on larger businesses. The total state and local tax burden in Texas is around 8.6% of personal income, which ranks 10th-lowest nationally according to the Tax Foundation’s most recent analysis. So the state does deliver on the promise of lower overall taxation, but the distribution of that burden falls more heavily on property owners and consumers than on income earners.

For high earners specifically, the structure heavily favors Texas. A household earning $1 million in California pays roughly $130,000 in state income tax alone. The same household in Texas pays zero. Even with $30,000-$50,000 more in property tax (depending on home value), the net savings are substantial. For middle-income households, the math is closer, and depending on home value the savings might be modest or even slightly negative compared to a state like Florida.

The Texas Comptroller’s office maintains detailed revenue dashboards and publishes the Biennial Revenue Estimate before each legislative session. If you want to see exactly where the money comes from in any given year, the data is public and updated quarterly.

Where The Reed Corporation comes in: we work with clients on the relocation math, the entity structuring for franchise tax efficiency, and the property tax appeal process. The franchise tax election (compensation deduction vs. cost of goods sold vs. 70% revenue cap) can change the tax owed by $20,000-$50,000 a year for mid-sized businesses, and we run that election analysis annually. For high-net-worth clients moving to Texas, we model the full state-and-local tax picture before the move so the property tax surprise doesn’t undercut the income tax savings.

Usually yes, but the gap is smaller than people think at this income level. Let’s run the actual numbers. A $200,000 household in Texas with a $600,000 home and typical taxable consumption pays roughly: zero state income tax, $9,600 in property tax (at 1.6% effective rate), and $6,600 in sales tax (assuming $80,000 of taxable spending at 8.25%). Total state and local tax burden: about $16,200, or 8.1% of gross income. That’s before federal tax, which would be similar in both states.

The same household in California with a $600,000 home (recently purchased, so assessed close to market value) pays: about $11,000 in state income tax (using 2026 brackets, married filing jointly, with standard deduction), $4,200 in property tax (at 0.7% effective rate, capped by Proposition 13), and about $7,500 in sales tax (similar consumption pattern, slightly higher rate). Total: about $22,700, or 11.4% of gross income. So Texas saves this household roughly $6,500 a year, or about $540 a month.

The savings are real but not major. At this income level, moving from California to Texas to capture $6,500 a year in tax savings might not make sense if other costs (housing in Austin can be comparable to inland California metros, food and services often higher in Texas urban cores) eat up the gains. The lifestyle and career factors usually dominate the decision at $200,000 income.

Some adjustments matter. If the California household has a long-held home with Proposition 13 protection, the property tax could be much lower than the $4,200 we estimated. A house bought for $300,000 in 1995 might still be assessed at $400,000 even though it’s worth $1.5 million today, which would put property tax at about $3,000. In that case, the comparison shifts more in California’s favor on property tax, but the income tax line still favors Texas by $11,000 a year.

The other variable is the cost of housing itself. Austin home prices in 2026 have moderated from the 2022 peak but are still high relative to the rest of Texas. A comparable home to a $600,000 starter home in California’s inland regions might cost $500,000-$650,000 in Austin, $400,000-$500,000 in Houston or Dallas, or $300,000-$400,000 in San Antonio. So if you’re moving from coastal California where the same starter home costs $1.2 million, the housing cost savings are substantial and add to the tax savings.

A common mistake is comparing tax burdens without accounting for the property tax mechanics. People hear ‘Texas has 1.8% property tax versus California’s 0.7%’ and assume California always wins on property tax. But California’s 0.7% is on the original purchase price plus 2% annual increases, while Texas’s 1.8% is on the current market value. For someone buying a new home today, the difference is closer than the rates suggest. Where California’s system wins decisively is on long-held property: a 30-year owner in California pays minimal property tax, while a 30-year owner in Texas pays property tax that has kept pace with market value.

Real-world example: A software engineer making $220,000 moves from Mountain View to Austin. Old California state income tax: about $14,500. Old California property tax on a $1.5M condo recently purchased: $10,500. Old California sales tax: about $7,000. Total: $32,000. New Texas: zero income tax, $20,000 property tax on a comparable $1.2M Austin house (the housing market in Austin is also expensive, so the price drop isn’t as big as people expect), $6,500 sales tax. Total: $26,500. Savings: $5,500 a year. Real, but not life-changing. The lifestyle change might dominate.

Where documentation matters: if you’re claiming Texas residency to escape California taxes, the FTB will scrutinize the move. We cover that in detail in our companion piece on Texas residency rules. For a clean break, you need to actually move (sell or rent out the California home, move family if applicable, change driver’s license and voter registration, switch primary doctors, change banking primary location, and so on).

Audit considerations: at $200,000 income, California isn’t likely to fight a residency change unless you have specific red flags (a California business, family still in California, a high-value real estate sale in the year of the move, or a large RSU vest that would have been California-source income). At higher income levels the audit risk increases substantially.

Where The Reed Corporation adds value at this income level: we help clients run the actual numbers based on their specific housing, consumption, and family situation, and we help them decide whether the move makes financial sense. Sometimes our advice is ‘don’t move, the savings don’t justify the disruption.’ Sometimes it’s ‘move, and here’s how to document it.’ We also handle the partial-year tax filing in the move year, which is more complex than people expect.

Because the income tax savings dwarf the property tax cost at high income levels. A household earning $5 million in California pays roughly $660,000 in state and local income tax. The same household in Texas pays zero state income tax. Even if their Texas property tax bill is $80,000 a year on a $5 million home (versus maybe $20,000 in California with Proposition 13 protection on a similarly-valued long-held home), the net savings are $600,000 a year. That’s a number worth restructuring your life around.

The math gets even more compelling for one-time events. Consider a founder who sells a business for $50 million. If the sale closes while they’re a California resident, the state portion of the federal long-term capital gains is taxed at the full 13.3% top rate, plus the 1% mental health services tax on income over $1 million. That’s roughly $7 million in California state tax on the sale alone. If the same founder establishes Texas residency before the sale and the sale is properly structured, that $7 million stays with the founder. The audit risk is real (we’ll cover that in the companion piece), but the savings are large enough that even high audit-defense costs are worth it.

Estate tax planning is another driver. Texas has no state estate tax. California also has no state estate tax. But New York has one with a $7 million exemption that drops sharply for estates above $7 million (the so-called ‘cliff’). For a New York resident with a $15 million estate, the New York estate tax can be over $1 million. Moving to Texas eliminates that. For ultra-high-net-worth families with $100 million+ estates, the multi-state estate tax rules is part of the relocation calculation.

Trust planning also favors Texas. Texas has favorable laws for self-settled asset protection trusts and dynasty trusts. The state has no rule against perpetuities for property held in trust (Texas adopted a 300-year rule in 2021, which is functionally equivalent for most planning purposes). Combined with the lack of state income tax on trust income for non-resident grantors, Texas has become a meaningful jurisdiction for trust planning, though it’s still behind South Dakota, Delaware, and Nevada in the dynasty trust market.

Equity compensation timing is huge. Tech executives with large unvested RSU positions often plan a Texas relocation around the vesting schedule. RSUs that vest after the executive establishes Texas residency may avoid California state tax on the vest, though California will try to claw back the portion attributable to services performed while a California resident. We’ve worked with clients on RSU sourcing analyses where moving six months before a major cliff vest saves $500,000-$2 million in state tax.

A common mistake at the high-net-worth level: assuming the move is automatic the day you sign the lease in Austin. California’s Franchise Tax Board is famously aggressive about claiming continued residency for former Californians, especially in the year of a large income event. We’ve seen audit cases where the FTB argued that someone who ‘moved’ in October was still a California resident through year-end because they kept the California home, the California business, the California family, and only spent 60 days in Texas. The 183-day presumption goes both ways: spending less than 183 days in your new state doesn’t help.

Documentation matters enormously at this level. Driver’s license change, voter registration change, doctor and dentist change, primary banking relationship change, attorney and accountant change, primary residence sale or genuine rental, family relocation (or documented business reason for split), club memberships, gym memberships, vehicle registration, address used on federal tax return, address used on brokerage and retirement accounts. The FTB looks at all of these.

Real-world example: A private equity executive with $4 million in annual W-2 income plus an expected $30 million carried interest payout over five years moves from San Francisco to Austin. Pre-move California state tax on $4M/year: about $520,000. Future expected California state tax on $30M carry: about $4 million. Total California tax exposure over the next five years if he stays: $6.6 million. Texas tax exposure: zero income tax, maybe $400,000 in property tax over five years on a $3 million Austin house. Net savings: $6.2 million. That’s worth a serious move.

Audit considerations: California will likely audit. They audit former high earners aggressively, sometimes years after the move. We help clients build the contemporaneous documentation that holds up in an audit, including travel logs (because the day count matters), business records showing where work was actually performed, and the full set of domicile-change evidence.

Where The Reed Corporation adds value at this level: we coordinate the relocation timing, the entity restructuring (often moving operating entities or holding companies to Texas-friendly structures), the equity compensation sourcing analysis, the trust planning, and the audit-defense documentation. For clients with $5M+ in annual income or large pending liquidity events, the planning effort usually pays for itself many times over in the first year.

Usually no, but there are exceptions, and the exceptions are where people get into trouble. The general rule is that wage income is sourced to the state where the work is physically performed, not the state where the employer is headquartered. So a software engineer who lives in Austin and works remotely for a New York-based employer is generally taxable on that wage income only by Texas (and Texas has no income tax, so the bill is zero). The employer might still withhold New York tax by mistake, but that’s recoverable through a New York nonresident return claiming a full refund.

The exception is the ‘convenience of the employer’ rule, which applies in a handful of states including New York, Pennsylvania, Nebraska, Delaware, and Connecticut. New York’s version says that if a nonresident employee works from outside New York for the employee’s own convenience (rather than the employer’s necessity), the wages earned while working remotely are still sourced to New York. So an Austin-based remote worker employed by a New York firm who works from Austin for personal reasons (rather than because the employer required it) could be taxed by New York on those wages.

This rule is contentious and has been litigated. The general framework is that if the employer has a bona fide business need for the employee to work from the remote location (a customer in Austin, a project that requires Texas presence, an office in Austin), then the wages are sourced to where the work is performed. If the employee is just working from home in Austin because they prefer it, New York says it can tax those wages. The COVID-era expansion of remote work made this rule controversial, and several states pushed back, but New York has maintained its position.

The practical implication: an Austin-based remote worker with a New York employer should look at the employer’s withholding and see whether New York tax is being withheld. If yes, the employee has a few options. Option one: try to get the employer to stop withholding New York tax and instead withhold no state tax (or Texas tax, but Texas has no income tax). This requires the employer to agree that the work is for the employer’s benefit at the Texas location, not the employee’s convenience. Many employers won’t agree because they don’t want the audit exposure.

Option two: continue having New York tax withheld and file a New York nonresident return. If the work qualifies for the employer-necessity exception, claim a full refund. If not, the employee owes New York tax on the wages and gets no credit against Texas (because Texas has no income tax to credit against). In effect, the Austin resident pays New York tax for the privilege of working remotely. This is the scenario most people don’t see coming.

A common mistake is assuming the move to Texas automatically eliminates state tax on remote work. For California, Illinois, most other states, that’s true: California can’t tax a Texas resident’s wages earned while working in Texas, regardless of where the employer is based. For New York and the other convenience-of-the-employer states, it’s not automatic. We see this issue regularly with clients who move from New York City to Austin, keep the New York job remote, and then are surprised at tax time when they still owe New York tax.

Real-world example: A senior engineer at a New York financial firm moves to Austin and keeps the job remote. Salary $400,000. Employer continues withholding New York tax. The engineer files a New York nonresident return. The IRS and the state look at the work pattern: the engineer is in Austin 350 days a year, the firm has no Austin office, the engineer’s role doesn’t specifically require Austin presence. New York’s position: the wages are New York source, the engineer owes New York tax of about $32,000 for the year. Texas tax: zero. Net result: the move saved zero on state income tax for this scenario.

Alternative scenario: same engineer, but the firm hires the engineer to develop a Texas market presence and lead business development in the southwest region. Now the role specifically requires Austin presence. The engineer can claim employer-necessity, the wages are Austin-source, New York can’t tax them, and the move saves the full $32,000 a year. The factual difference between the two scenarios is significant, and it’s the kind of detail that needs to be documented contemporaneously, not constructed after an audit notice arrives.

Documentation that helps: a written employment agreement specifying the Austin work location, a business justification for the Austin role, evidence of Austin-based client interactions or business activities, travel records showing time spent in New York (if any) compared to Austin, and ideally a formal hiring or transfer document treating the role as Austin-based rather than New York-based with a remote accommodation.

Audit considerations: New York audits the convenience-of-the-employer scenarios aggressively, particularly for high earners. The state has won many of the litigated cases. The risk isn’t just the back tax: it’s also penalties, interest, and the cost of defending the audit. We’ve seen audit-defense costs of $25,000-$50,000 for cases involving $80,000-$150,000 of disputed tax.

Where The Reed Corporation adds value: we work with remote workers (especially those leaving New York for Texas) on the employment-structure analysis, the documentation, the employer conversations about withholding, and the New York nonresident filings. For high earners with convenience-rule exposure, getting the structure right at the start of the move can save tens of thousands of dollars annually.

The Texas franchise tax, formally called the franchise tax or margin tax, is an entity-level tax that applies to most business entities doing business in Texas. It’s not technically an income tax (the Texas Constitution prohibits one), but it functions similarly in some respects. The tax is administered by the Comptroller of Public Accounts and is filed annually on Form 05-158 (long form) or Form 05-169 (EZ computation, available for smaller filers).

The threshold for actually owing tax is total revenue above $2.65 million for the 2026 report year. Below the threshold, a business files a no-tax-due report but owes no tax. Above the threshold, the tax is calculated on the ‘taxable margin,’ which is the lesser of: 70% of total revenue, total revenue minus cost of goods sold, total revenue minus compensation paid to employees and owners (capped at $400,000 per person), or total revenue minus $1 million. The taxable margin is then multiplied by the rate: 0.375% for retail and wholesale businesses, 0.75% for everyone else.

Is it a backdoor income tax? It’s a tax on businesses rather than individuals, so technically no. But for owner-operated businesses, the tax does function like a low-rate income tax on the business’s gross margin. A consulting firm with $5 million in revenue and $2 million in employee compensation has a taxable margin of $3 million (revenue minus comp). At 0.75%, the tax is $22,500. That’s a meaningful number but small compared to what the same business would pay in California (where the LLC fee runs from $800 to $11,790 depending on revenue, plus the personal income tax on pass-through income to the owners).

The four-way calculation is where planning matters. Depending on the business’s compensation structure and cost of goods sold, one of the four methods will produce a lower taxable margin than the others. For service businesses with high employee compensation, the comp deduction usually wins. For retail and distribution businesses with high cost of goods sold, the COGS deduction wins. For high-margin businesses with low compensation and low COGS, the 70% revenue cap is binding. For most small businesses just above the threshold, the $1 million subtraction is often the best choice because it produces the lowest taxable margin.

A common mistake is treating the franchise tax as an afterthought. We see businesses file the EZ form without running the four-way calculation, often paying more tax than necessary. For a $5 million revenue service firm, choosing the comp method over the COGS method might save $15,000-$25,000 a year. Over a decade, that’s a real number. The cost of running the calculation properly is small, and the savings can be substantial.

Passive entities deserve special attention. A ‘passive entity’ under Texas law is a partnership or trust whose income is at least 90% passive (rents, royalties, interest, dividends, capital gains on the sale of investment property). Passive entities are exempt from the franchise tax. So real estate investors who hold property through Texas LLCs may not owe any franchise tax even if their gross rental income exceeds the threshold. But the qualification rules are specific: an LLC that performs significant management activities (rather than passively collecting rent) may not qualify. We see disputes over this designation regularly.

Real-world example: A real estate investor owns 20 rental properties through a Texas LLC. Gross rental income: $1.8 million. Net rental income after expenses: $400,000. The LLC qualifies as a passive entity because the income is from real estate rentals and the management is performed by a third-party property management company. Franchise tax owed: zero. Compared to a similar LLC in California, which would owe the $800 minimum LLC fee plus the gross-receipts LLC fee ($6,000+) plus the personal income tax on the $400,000 of pass-through income, the Texas treatment is substantially better.

Alternative scenario: same investor, same LLC, but the investor manages the properties personally and the LLC takes a management fee from each property. Now the LLC has active management income, may not qualify as passive, and owes franchise tax on the gross receipts. The classification can swing tens of thousands of dollars depending on how the business is structured.

Documentation that helps: an annual analysis of the passive entity test, with revenue broken down by source category and documentation of who performs each management activity. For LLCs that operate close to the passive/active line, structuring the operations clearly is worth the effort.

Audit considerations: the Comptroller audits franchise tax returns selectively, often based on revenue thresholds and industry. Construction, services, and real estate are common audit targets. The audit process is administrative through the Comptroller’s office, and resolution often involves negotiating the taxable margin calculation or the passive entity classification. Penalties for underpayment can be substantial (up to 50% in some cases).

Where The Reed Corporation adds value: we handle the franchise tax election analysis annually for our business clients, structure entities to make the most of the passive entity exemption where appropriate, defend franchise tax audits, and coordinate the federal and Texas filings for owners of multiple entities. For business owners with revenue in the $3-20 million range, the franchise tax planning often saves more in tax than the cost of our services.