7 States with No Income Tax

Ante Up!

Most states levy a cover charge for individuals known as personal income tax. That tax can add significantly to the federal tax burden placed on an individual or a family. The states with the highest rates of personal income tax are:

  • Vermont - 9.5% maximum
  • California- 10.3% maximum

In Vermont, the maximum total tax burden on an individual, including federal tax at the highest rate of 35%, is a shocking 44.5% of that person's income. In California, due to a 1% mental health tax charged on incomes of over $1,000,000, the maximum total tax burden can be up to 45.3% of a person's income.

With such high rates of personal income tax in many states, it leaves many wondering if there is way to reduce taxable income.

Federal Income Tax - Is it Constitutional?

States with No Income Tax

While there are many strategies to reduce taxable income - which are beyond the scope of this article - there is one sure-fire way to reduce income taxes on that income. You can choose to reside in one of the seven states that do not levy personal income tax:

Two other states, New Hampshire and Tennessee, impose taxes for individuals only on dividend and interest income. In fact, in 1960 the Tennessee Supreme Court ruled tax on personal income to be unconstitutional in its decision in Jack Cole Company v. Alfred T. MacFarland.

Do States with No Income Tax Compensate with Higher Sales Tax?

Do states with no income tax compensate by charging higher sales tax in order to raise revenue? Of the seven states that impose no income tax, along with New Hampshire and Tennessee, four charge among the highest sales tax rates in the country:

  • Nevada - 6.5%
  • Tennessee - 7.0%
  • Texas - 6.25%
  • Washington - 6.5%

Despite the availability of this alternate tax to raise revenue, Alaska and New Hampshire are two states that charge NO SALES TAX, in addition to charging no personal income tax.

Do They Make it Up in Corporate Income Taxes?

Do the seven states that charge no personal income tax, with the addition of New Hampshire and Tennessee, make it up by charging higher corporate income taxes?

  • Alaska. Well, Alaska certainly tries. Their graduated income tax rates top out at 9.4% for corporate income of over $90,000.
  • Florida. Florida charges a flat corporate income tax rate of 5.5%, or the higher of of the flat rate or 3.3% alternative minimum rate, for taxpayers who owe federal AMT.
  • Nevada charges NO corporate income tax.
  • New Hampshire has two separate corporate taxes: the BPT (Business Profits Tax) and BET (Business Enterprise Tax). New Hampshire charges 8.5% BPT for corporations with gross receipts over $50,000. BET is a 0.75% tax on enterprise value tax base on corporations with gross receipts of over $150,000 or an enterprise value tax base over $75,000.
  • South Dakota charges NO corporate income tax, only a 6% assessment on net income of banks.
  • Tennessee charges 6.5% corporate income tax and a franchise fee of 0.25% of the greater of net worth or real or tangible property.
  • Texas charges NO corporate income tax, only a 1% franchise tax, which is a tax assessed on gross receipts of most taxable entities.
  • Washington charges NO corporate income tax, but assesses a tax on gross receipts called the Business & Occupation (B&O) Tax.
  • Wyoming charges NO corporate income tax.

Federal Income Tax - Is it Constitutional?

Do you think personal income tax is (or should be) constitutional?

  • Yes, it's a cover charge for living here in America, and I gladly pay it.
  • Yes, but I do all I can to reduce its impact on my personal/family's budget.
  • No, Ron Paul has a point - the government does not have the right to impose an income tax on its citizens.
See results without voting

Conclusion

For individuals and families looking for tax-friendly states in which to live, all these states are great choices, but with Alaska (break out the Snowmobile) and New Hampshire offering both no personal income tax and no state sales tax, they are standouts.

For businesses looking for tax-friendly states in which to locate, Nevada, South Dakota, Texas, Washington, and Wyoming are all good options, as they offer limited or no corporate income tax, as well as no personal income tax.

For all my fellow small business/entrepreneur friends, a word of caution. Please do NOT incorporate in one of these tax-friendly states unless you plan to locate there and do substantial business in the state. The legal term is 'nexus'; there must be a strong connection between you, your business, its location, and the area in which you do the majority of your business. This way, you will avoid a heap of trouble with your home state's department of revenue that even a team of fancy CPAs can't get you out of.

Why not consider taking advantage of your right to 'vote' for the most fiscally responsible state government possible - with your choice of personal and/or corporate residence - if you have the inclination and the opportunity to do so. You have everything to gain, except more taxes.

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Comments 26 comments

kenneth avery profile image

kenneth avery 4 years ago from Hamilton, Alabama

Staci, GREAT read. Very deep and informative. Until I read this hub, I never knew of any state that had NO income tax! Hmmm, if I could afford to move, naah, Uncle Sam would devise a way to tax that. I voted up and away. I am now a fan and follower if that is okay with you. Respectfully, YOU are an amazing talent. Kenneth Avery, from a rural town, Hamilton, in northwest Alabama, that reminds you of Mayberry where Andy and Barney lived. When I was younger and when my family purchased our first TV, a Philco black and white deal, I thought when I watched Andy Griffith in Mayberry that when I died, I would go to Mayberry. Keep up the great work. Peace.


Lester 5 years ago

The IRS is a JOKE!!! Individual Income Taxes are Unlawful.....PERIOD!!!!!!!!!!


William Bondsteel 6 years ago

Tennessee don't have a state income tax, but they have a nine and one half percent sales tax that also includes grocery's. That makes it kind of rough.


KeithTax profile image

KeithTax 6 years ago from Wisconsin

I read too many hubs of tax advice that are lacking. That is not the case here. This a good article with solid information. I recommend you bookmark this article for future reference.


Mark Randall 6 years ago

We lived in Florida having moved from a state where we paid income tax. Let me tell you, I loved it during tax season. There was only one return to prepare--our Federal return.


shai77 profile image

shai77 6 years ago

Hi :-)

Thank for the info.

Loved the Hub and gave it a thumb up :-)


Staci-Barbo7 profile image

Staci-Barbo7 6 years ago from North Carolina Author

RSPowell,

Given the deflating property values all across the country in the current economic climate, your comments concerning inflated property valuations by government bodies are relevant to more than just Texans. Thank you for the excellent resource link. Our neighbors should be aware of their right to appeal tax burdens imposed based on unrealistic property valuations.


rspowell profile image

rspowell 6 years ago from Houston, TX

Texas does not have a state income tax (thankfully!) - but, the trade-off is that our property taxes are high.

This is especially being felt hard in the present economic climate ... our real estate values in the Houston area have been in decline for a couple of years and people need to save money on property taxes NOW!

Texas Fair Tax

http://www.texasfairtax.com


Dan from Texas 6 years ago

Yes we have no state income tax, and some say our school district and land taxes are some of the highest in the nation. BUT - just west of Fort Worth, near a major city I can still buy a 3 bed / 2 bath brick house with attached garage for under 80k. Came to Texas in 1968 and have never left, travel all over as a contractor, and I think cost of living and standard of living better than anywhere else.


Sara Algoe profile image

Sara Algoe 6 years ago from Phoenix, Ariz

very informative..


Staci-Barbo7 profile image

Staci-Barbo7 7 years ago from North Carolina Author

Leader Writing, I couldn't agree more. Those that have the option to relocate to tax-friendly states have a powerful means of encouraging and supporting fiscal responsibility among state governments.


Leader Writing profile image

Leader Writing 7 years ago from Tracy, California

Good information, and useful in this time when so many are losing their jobs and homes in some states and looking for a better place to make their lives.


Staci-Barbo7 profile image

Staci-Barbo7 7 years ago from North Carolina Author

Jim, I heartily understand your frustration. With respect to the law imposing the fine upon defendants who are not guilty, it must only be challenged successfully once. Thereafter, it will be of no force and effect.

It requires constant vigilance to protect the rights of the individual against the potential for abuse of power of the State. The Constitution was crafted to secure to the people this guarantee of freedom from oppression. Whether it's fining innocent defendants, stripping citizens of the right to freedom of political speech, or requiring that citizens pay income taxes of up to 50% of their annual salary, our Constitution sets out protections against such intrusion into the private lives and purses of the people of this country. However, the Constitution is only as good as the citizens and the judiciary who are willing to enforce it.

Friends, know how the judges in your county, your state, and your nation are ruling on important matters that impact your rights as an individual:

Freedom of speech,

Freedom of religion,

Right to bear arms,

Right to property (severely limiting eminent domain), and

Right to due process

being among those rights which have suffered assault in recent years.

Give your support only to those public servants who faithfully construe the rights set forth in our Constitution and err in favor of the individual. In this way, you will guard the freedoms intended by our founding fathers - to this generation and to our children and to those who come after them.


jim10 profile image

jim10 7 years ago from ma

I couldn't agree more. I heard it on the news a few weeks ago and just could not believe my ears. I then read it at their website. Sure it costs money to have the appeal but, in general if you feel you were wrongly given a ticket you will fight it. If you think it might have been your fault or you know it was, you probably won't waste your time fighting it. If cops are giving out legitimate tickets then the judge will side with them and the citizen will pay the high fine involved. I just can't believe it. Deval Patrick is a moron and I'm sure he won't be here much longer. Here is an article about it if you don't mind. http://www.telegram.com/article/20090702/NEWS/9070...

I believe our state is making cops more like just toll takers with guns.


Staci-Barbo7 profile image

Staci-Barbo7 7 years ago from North Carolina Author

Jim, I am shocked at the unbridled arrogance of the MA legislature in fining a defendant for a speeding ticket - even if found NOT guilty. On what possible grounds? What an example of governmental overreaching and violation of due process!

Protest by the citizens, unless there is a groundswell from the people and scrutiny from the media, will not resolve the issue. The law should be challenged on constitutional grounds. The expense of the fine is not worth the cost of the appeal to one individual, of course, but the legal principles involved are very much worth appealing as far as need be until this provision is overturned, for the sake of justice in that state. If the law is not challenged, you can expect to see your individual rights further eroded by the MA legislature.


jim10 profile image

jim10 7 years ago from ma

Taxes are ridiculous when we have absolutely no say in the matter. I live in MA and our sales tax is set to increase next month. The other citizens and I had no say in the matter. The best part is our services just get worse and worse. The prices of public transportation goes up every year. We now have a law that if you fight a ticket that you get you need to pay a $25 fine whether you are found at fault or not. I have gotten 3 tickets in my life and none were justified. I was given them because I was young and in a fast muscle car. I fought all three cases and won. Today I would have had to miss work and lose pay and pay a $75 fine on top of that. Our government is practically robbing

us and well we need to take it or protest and get thrown in jail. I think I should pack up the family and head to New Hampshire. Their motto speaks for itself "Live Free or Die". At least the people there won't put up with this crap.


Staci-Barbo7 profile image

Staci-Barbo7 7 years ago from North Carolina Author

Ivorwen, that indicates a measure of the wisdom of Wyoming's legislature, as your elected officials obviously understand that their citizens may be struggling during this time, and that decreasing - not increasing - the individual tax burden is the best way to promote economic growth. Thanks for taking time to comment.


Ivorwen profile image

Ivorwen 7 years ago from Hither and Yonder

In Wyoming, they recently dropped the sales tax on food, to make it easier for those truly struggling.


Staci-Barbo7 profile image

Staci-Barbo7 7 years ago from North Carolina Author

K@ri, you definitely have great options as a nurse. I know I've read recently, either on HubPages or on Yahoo, that traveling nurses make even better money. Thanks for taking time to read and your kind comments. Best wishes to you!


k@ri profile image

k@ri 7 years ago from Sunny Southern California

This is great advice! I lived in NH as a child...maybe I should go back! As a nurse, I can find work anywhere...I should take advantage of that! Thanks for the great hub!


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