Income tax can take a big bite out of your wallet and your company’s profits. But not every state in the union collects income taxes. Some states, such as Texas, have become known as business havens for budget-conscious entrepreneurs, in part because they don’t collect income taxes.

For comparison, here are the nine states with the highest income tax rates:

1. California – 13.30%
2. Hawaii – 11.00%
3. New York – 10.90%
4. New Jersey – 10.75%
5. Oregon – 9.90%
6. Minnesota – 9.85%
7. Vermont – 8.75%
8. Iowa – 8.53%
9. Wisconsin – 7.65%

This article takes a look at nine states with no income tax and examines everything taxpayers need to know about these tax-reduced areas.

What is Income Tax?

Income tax is a critical source of revenue for state and federal governments around the world. There are different types of income tax you may have to pay depending on where you live.

An individual income tax is levied on the wages, salaries or other income of individuals. States usually impose these.

Corporate income tax is levied on entrepreneurs and their income from business operations.

Meanwhile, state and local income taxes are other forms of income tax that states have more power over. These differ from federal income taxes and are subject to each state’s specific tax code. Some states, such as California, levy significant income taxes, while others do not levy additional income taxes.

Related: States With The Lowest Corporate Tax Rates

Why do some states levy income taxes?

Income tax is a very reliable source of income. People have to make money to spend money, which means that raising an income tax provides local and federal governments with enough resources to build schools, maintain roads, pay law enforcement, and fund all other types of government operations.

Related: Plan ahead to avoid surprises at tax time

Which US states does not have to pay taxes on income?

Only a few states charge income tax to their citizens.

Nine states have no income tax or will phase out income tax soon. These states are:

• Alaska
• Florida
• Nevada
• New Hampshire – technically New Hampshire generates tax investments and interest income, but those taxes will disappear in 2023.
• south dakota
• Tennessee
• Texas
• Washington State — keep in mind that Washington charges income tax on investment income and capital gains tax, but only on those who earn a certain amount.
• Wyoming

If you live in one of these states, you take home more of your money from most sources of income, such as your salaries and tips.

Related: Small Business Taxes Around the World, Mapped: See Where Rates Are High, Low, and Nonexistent

Compare states with no income tax

Does this mean you should immediately pack your bags and try to relocate to one of the above states? Not necessary. Keep reading to check out each state with no income tax and compare them based on their total tax burden and other factors.

Alaska

Alaska is both a cheap and an expensive place to live. For example, it has no income tax or sales tax. The total tax rate for Alaska is 5.10% – the lowest of all 50 states. In addition, all Alaska residents receive an annual payment from the Alaska Permanent Fund Corp.

Still, the cost of living in Alaska is higher than average due to the distance from manufacturing centers and the relative remoteness of the cities. So you can expect to pay more for things like groceries and gas.

Florida

Florida is a popular wintering state thanks to its retirees and warm temperatures. Although excise and sales taxes in Florida are higher than the national average, the total tax burden for Florida residents is 6.97%.

It does have higher than average housing costs, but on the plus side, Florida is a relatively cheap state to live in if you want to go to school.

Related: A Florida underwater property is going for $43 million. The developer calls it a ‘Unicorn’.

Nevada

Nevada’s total tax rate is 8.23%. Citizens do not have to worry about income tax as there are high sales taxes on alcohol, gambling, grocery shopping, buying clothes, casinos and hotels.

New Hampshire

Then there is New Hampshire. As mentioned above, New Hampshire does not charge general income tax, but it does levy income tax on certain things. The total tax burden for New Hampshire residents hovers around 6.84%, which is relatively low compared to other states.

New Hampshire is a relatively small state and the cost of living can vary depending on where you live.

south dakota

South Dakota has a total tax burden of 7.37% for its filers. While it has no income tax, it does levy heavy taxes on things like cigarettes and alcohol.

It also charges very high sales taxes and has higher than average property tax rates, making it expensive to live here if you don’t have a good source of income.

Tennessee

Tennessee’s total tax burden on its residents is 5.74%. As a result of legislation passed in 2016, Tennessee reduced unearned income taxes for its citizens. But this only resulted in a higher sales tax rate and the overall highest beer tax rate for any state in the union, at $1.29 per gallon.

Texas

Texas has a total tax rate of 8.19%. Most of the taxes come from excise and sales tax because the residents hate the idea of ​​income tax. Please note that sales tax can be as high as 8.25% in certain jurisdictions.

In addition, Texas property taxes are higher here than in most other states. Even with all that, there’s no denying that Texas has a relatively low tax burden compared to other circumstances.

Related: A Texas farmer offers Elon Musk 100 acres of land to move Twitter offices from California to Texas

Washington

Washington has a relatively young population and an average tax rate of 8.34%. Many residents pay high turnover and excise taxes and you will notice that petrol prices at the pump are also higher than average.

Combine that with a higher-than-average cost of living and high housing costs, and it’s clear that Washington isn’t among the most affordable states, even though it doesn’t (for most of them) collect income taxes.

Wyoming

Finally, Wyoming is a very unpopulated state. It charges a total tax burden of 6.14% on its citizens, including excise, sales, (some) income and property taxes.

While Wyoming may be cheap, keep in mind that it’s only for those who are fans of the frontier lifestyle. This empty state has little to offer other than national parks in the way of metropolitan areas or tourist attractions.

Should you move to a state with no income tax?

Moving to a state with no income tax is an attractive prospect. No one likes getting a check from work just to see what the government needs to pay for necessary services.

While you might rationally understand the purpose of income taxes, you may instinctively feel despondent when you see your hard-earned money taken away as soon as you get it.

But while it may be tempting to move to a state with no income tax, consider the total tax burden each state imposes on its residents before moving forward. You should also consider what each state has to offer.

Related: 4 effective strategies to lower your income taxes

For example, many people move to California, which is widely believed to be one of the most expensive states to live in. Why? It’s a beautiful state, with lots to do and job opportunities, especially in the entertainment and technology industries.

Similar states, such as New York, Hawaii or Minnesota, may have high federal income tax rates on all taxable income and additional taxes to boot, but counter that with low local sales tax rates.

Wyoming, on the other hand, could impose a low tax burden on its residents. But you must have a job in agriculture, ranching or mining. There’s not much to see and do in Wyoming if you’re not a fan of the outdoors.

Then you must take corporate tax into account. Self-employed individuals may find some states better than others regarding the final tax bill or their state tax brackets.

Factors such as health care, pensions and dividend income can make states such as Alabama, New Jersey, Illinois and others in the United States attractive places to live and work.

Therefore, do not immediately choose one of these states and move just because there is no income tax on your earned income. Income taxes are valuable and essential to government, and in many cases can help fund some of the most fun and profitable parts of the state’s economies.

What’s the bottom line on states with no income tax?

There are plenty of states you can move to in the US without income tax. These could be ideal states to move to in the future or states to start a business.

But remember, these no-income-tax states have pros and cons; consider the total tax burden imposed on you and prospective businesses in each state before heading for “greener” pastures.

Looking for more useful articles to expand your financial knowledge? Check out the resources for entrepreneurs’ money and finances here.