Arizona vs. Texas: Which Is Better for Retirement Taxes?

Texas is one of nine states with no income tax at all, and unlike most of the others, it's constitutionally locked in: a 2019 ballot measure amended the Texas Constitution to require a statewide vote before the legislature could ever create a personal income tax, not just a policy choice that could change with a future legislature. For retirees, this means Social Security, pension payments, IRA and 401(k) withdrawals, and any other income source are entirely untouched by state tax, with no state return to file and no age-based exemption to track.

Arizona's flat 2.5% applies to pension income and retirement account withdrawals, the same categories that pass through Texas completely untaxed. A retiree drawing $150,000 a year from IRA and 401(k) accounts faces roughly $3,750 a year in Arizona tax at that flat rate; the same withdrawal in Texas produces zero state tax. Social Security and military retirement pay are a wash between the two states, both fully exempt in Arizona, and untaxed in Texas because nothing is taxed there.

Property tax is where the comparison meaningfully reverses direction. Texas has some of the highest effective property tax rates in the country, averaging around 1.6% of assessed home value statewide, with many counties running higher. Arizona's effective rates run roughly 0.5% to 0.7% of assessed value depending on county and any special district assessments, a difference of two to three times on a comparably priced home. On a $500,000 house, that's a rough difference of $4,500 to $5,500 a year in property tax alone, enough to offset or exceed the income tax savings for a retiree without especially large retirement account withdrawals.

Texas does offer real property tax relief for retirees specifically: homeowners 65 and older can claim an additional homestead exemption on top of the standard one, and school district property taxes are frozen at the amount owed in the year the homeowner turns 65, so that portion of the bill doesn't rise with future appraisal increases even as home values climb. This meaningfully softens the property tax gap for a retiree who stays in the same home long-term, though it doesn't eliminate it, and county, city, and other special-district taxes outside the school portion aren't covered by the freeze.

Sales tax runs slightly higher in Texas: a 6.25% state rate with local add-ons bringing the average combined rate to around 8.20%, close to Arizona's typical combined range of 8% to 9% depending on the specific city, so this factor is close to neutral between the two states rather than a meaningful differentiator either way.

Neither state has an estate or inheritance tax, so wealth transfer planning isn't a differentiator here. For military retirees specifically, both states are attractive for the same reason as the Nevada comparison: Arizona fully exempts military retirement pay and Texas has no income tax on anything, so this population sees no state tax on military retired pay in either state, and the decision comes down to non-tax factors, proximity to a specific base community, family, climate, and the property tax and cost-of-living trade-offs above.

Roth conversion planning again favors Texas at the margin, since a conversion has no state-level cost at all there, versus Arizona's flat 2.5% on the converted amount. That's still a small, predictable cost relative to what most alternative states would charge, but it's worth including explicitly in the multi-year conversion math rather than assuming the two states are equivalent once income tax is accounted for.

The honest way to run this comparison for a specific household is to model the actual retirement account withdrawal amount against Arizona's 2.5%, and separately model the actual property tax bill on the home being considered in each state, rather than defaulting to 'no income tax always wins.' For a retiree planning to draw heavily from pre-tax accounts while renting or owning a modest, lower-valued home, Texas usually comes out ahead. For a retiree with a large, high-value home and comparatively modest retirement account withdrawals, Arizona's property tax advantage can outweigh Texas's income tax advantage entirely.

Run the property tax comparison on the actual home price range you're considering in each state, not just the income tax rate. At Texas's roughly 1.6% average effective rate versus Arizona's 0.5% to 0.7%, the property tax difference on a higher-value home can exceed what Texas saves you in income tax.

If you're planning large annual IRA or 401(k) withdrawals and expect to keep housing costs modest, relative to home value, Texas's zero income tax produces a real, quantifiable savings worth modeling explicitly against Arizona's flat 2.5%.

• Assuming Texas's 'no income tax' framing means an automatic overall savings over Arizona without checking the property tax bill on the specific home being considered.
• Not claiming Texas's over-65 homestead exemption and school-tax freeze, which meaningfully reduce the property tax gap for a retiree who stays in the same home long-term.
• Overlooking that Texas's school-tax freeze doesn't cover county, city, or other special-district portions of the property tax bill, which can still rise with appraisal increases.
• Assuming military retirement pay is taxed differently between the two states; it's fully exempt in Arizona and, because there's no income tax at all, untaxed in Texas as well.