The States Where Federal Income Tax Goes to Zero — And Which Stocks Benefit From That

Here is the picture most investors carry around: the share of Americans who pay no federal income tax is a story about tax policy, fairness, or some debate about who "should" contribute more. The number exists in a political column and has nothing to do with your watch list.

The problem with that picture is that it deletes the cash. Those filers still spend money. They buy groceries, fill tanks, replace clothes, and pick up household goods. The zero-tax filer isn't a policy abstraction. They are a customer. And they are not distributed evenly across the country.

The IRS data for 2023 tells you exactly where they are. In Mississippi, 29% of all federal tax filers owed no federal income tax. New Mexico and Louisiana each sat at 28%. Arkansas, Alabama, West Virginia, Oklahoma, and Kentucky ranged from 25% to 27%. At the other end, Washington, D.C., had the lowest share at approximately 16%. In 10 states total, roughly one-quarter of filers paid nothing to the federal government on their income tax return.

Here is the part the tax article never tells you: the states with the highest concentration of zero-tax filers are the same states where discount retailers cluster.

Now label the props.

The standard deduction — the automatic chunk of income the federal government says you can earn before filing even matters — shields income up to a threshold. After the Tax Cuts and Jobs Act nearly doubled that deduction, the bar moved dramatically upward. A single person earning below roughly $15,750, or a married couple below roughly $31,500, owes nothing. That is before you even add refundable credits like the Earned Income Tax Credit, which can wipe out liability for working parents earning well over $50,000 if they have enough children.

So the 30% of filers who paid no federal income tax in 2023 is not a random number. It is a function of where income stops relative to where the government set the floor. And that floor is higher now than at almost any point in recent history. The Tax Policy Center estimated that 40% of all households — roughly 76 million tax units — will pay zero federal individual income tax in 2025.

Here is the mapping:

• Standard deduction threshold = income level below which the government does not tax.
• Zero-tax filer = household whose income, after deductions and credits, falls at or below that threshold.
• Geographic concentration = the states where median household income runs closest to that threshold.
• Discount retail customer base = the same households, measured by a different label.

Put away the acronym for thirty seconds. Think of it this way: a grocery store in a wealthy suburb and a dollar store in rural Mississippi are reading the same national GDP headline, but they are serving two different populations. One customer saves 15% of their income and shops for deals between priorities. The other customer saves 1% and shops for necessities every other day. The tax data tells you which town has more of which customer.

In the toy version, imagine two towns of 1,000 people.

Town A: 850 people pay income tax. Their average annual income is $70,000. They visit Target or Costco monthly. A $200 holiday bonus might go to savings, a credit card payoff, or a small luxury.

Town B: 280 people pay no income tax. Their average annual income is $25,000. They buy in cash, shop weekly, and price-compare across three stores before walking out. A $200 tax refund is spent within two weeks, entirely.

Economists call this the marginal propensity to consume. Lower-income households spend a far larger share of every additional dollar they receive. Higher-income households save a bigger fraction. The difference is not about work ethic. It is about the shape of a budget where rent, food, and gas already fill every hour.

The tax data shows that the South, the rural Midwest, and parts of the Mountain West are Town B. Nearly half of Southern states had poverty rates of 15% or higher in 2024, with several near the bottom nationally for median household income. That is why the zero-tax-filer share is highest there — not because of geography, but because of income.

Now bring the model back to a stock.

Dollar General operates 20,942 stores across 48 states. The company's own spokesperson has identified its core customer as someone earning $40,000 or less per year. Texas alone holds 1,948 Dollar General stores. The company's revenue in fiscal 2025 was approximately $42.7 billion, and in the second quarter of fiscal 2026, same-store sales grew 3.5%, driven by a 2.0% increase in customer traffic and a 1.5% increase in average transaction value.

Connect the pieces. The states where nearly one-third of tax filers owe no federal income tax are the states where Dollar General's stores are most densely packed. The customers who benefit most from a high standard deduction and refundable credits — the ones whose disposable income is essentially every dollar they earn above necessities — are Dollar General's customer base.

This matters for the investment case in two directions.

The bullish path: when tax policy keeps more money in the hands of lower-income households — through higher deductions, expanded credits, or tax refunds — that money flows disproportionately into consumption, and it flows disproportionately into discount retail. Dollar General's Q2 2026 traffic growth of 2% suggests the customer base is not shrinking. The basket is getting larger. A household that pays no federal income tax still has to buy what it needs, and Dollar General is the store that needs.

The cautionary path: the same structural force that makes these households reliable customers also makes them fragile ones. They spend most of their income on necessities. When prices rise faster than their wages, their basket shrinks, they trade to cheaper brands, or they skip non-essentials entirely. Dollar General's entire business model depends on customers who are already buying the cheapest available option. There is not much room to squeeze further demand from someone who is already spending their last dollar at your register.

There is also the question of policy reversal. The Tax Policy Center projects that under current law, the share of households paying no federal income tax will decline from 40% in 2025 to roughly 33.5% by 2035 as certain Tax Cuts and Jobs Act provisions sunset. If the standard deduction stops growing or credits shrink, more households cross into the taxable population — which means less take-home pay, which means cut spending, which means dollar stores feel it first.

That analogy has now done its job. Here is where it breaks.

Not every zero-tax filer is a dollar-store customer. Some are retirees drawing Roth IRA distributions that are untaxed. Some have capital losses that offset gains. Nearly 7% of households in the top 10% of earners will pay no federal income tax in 2025, according to the Tax Policy Center, largely because of deductions, losses, and tax-deferred income. Those people do not shop at Dollar General.

Conversely, Dollar General has customers who absolutely pay federal income tax — people earning $40,000 to $70,000 who choose convenience and low prices over prestige. The correlation between zero-tax-filer geography and Dollar General density is real, but it is not a perfect overlap.

And the tax data does not tell you about payroll taxes, which these households do pay — starting from the first dollar of income, at a flat rate. A Mississippi filer who owes nothing in federal income tax may still pay several thousand dollars in Social Security and Medicare taxes, plus high state and local sales taxes. Their disposable income is not what the "zero tax" headline suggests.

If you remember one test, use this one: when tax policy changes, ask which denominator moves. A higher standard deduction keeps more people below the taxable threshold, which concentrates disposable income in the lowest brackets, which flows to discount retail. A lower standard deduction does the reverse. The stock does not care about the politics. It cares about the customer's checkbook.

Dollar General trades at roughly 16 times trailing earnings, with an enterprise value-to-EBITDA multiple around 10 and a dividend yield near 1.9%. The valuation is not expensive for a company growing same-store sales with increasing traffic. But the structural question is whether the customer base that drives those sales — concentrated in states where income runs close to the federal tax floor — is resilient or already stretched.

The tax data gives you one way to map that question without waiting for the next earnings call.