Taxes are an inevitable part of doing business—or are they? Maybe you’ve heard about the states with no income tax and wondered whether you can keep more of your hard-earned money by incorporating your business in one of the seven states with no income tax or perhaps just one with lower overall tax rates.

Unfortunately, state and local taxes aren’t that cut and dry, and there’s a good reason many business owners stay in the state where they initially organized their business. Let’s dive into the most tax-savvy states and what that means for residents and business owners.

7 States with No Income Tax

First, let’s talk about the states that don’t levy a personal income tax: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming.

Living in one of these states means you can say goodbye to state income tax returns, a small victory worth celebrating.

New Hampshire and Washington also deserve to be mentioned here because New Hampshire exclusively taxes investment income from dividends and interest, while Washington taxes only capital gains.

But before you put a for-sale sign outside your house and hire a moving company for your business, consider this: states need to collect revenue somehow. Just because a state doesn’t levy an income tax doesn’t mean it’s a tax-free haven.

For example, Tennessee, Nevada, and Texas don’t have a state-wide income tax but do have a state sales tax. These states’ combined state and average local sales tax rates are on the higher end—9.55%, 8.24%, and 8.20% respectively, according to the Tax Foundation.

Compare that to Oregon, which has one of the higher marginal state individual income tax rates in the country at 9.9% but doesn’t have a statewide sales tax.

Considering a State’s Overall Tax Burden

Rather than looking solely at a state’s income tax rates, it’s helpful to consider its overall tax burden. This metric takes into account a variety of taxes paid by residents, including:

• Property taxes
• Sales taxes
• Excise taxes on alcoholic beverages, amusements, insurance premiums, motor fuels, utilities, tobacco products, and other transactions
• License taxes on motor vehicle registrations, hunting and fishing, occupations, businesses, and other miscellaneous licenses
• Individual income taxes
• Corporate state income taxes
• Estate and inheritance taxes
• Documentary and transfer taxes
• Special assessments for property improvements

According to the Tax Foundation, the states with the lowest tax burden are:

1. Alaska: 4.6%
2. Wyoming: 7.5%
3. Tennessee: 7.6%

The states with the highest overall tax burden are:

1. New York: 15.9%
2. Connecticut: 15.4%
3. Hawaii: 14.1%

Considering a State’s Business Tax Climate

Personal income taxes aren’t the only taxes that can impact your overall tax burden. States can levy a variety of taxes on businesses, such as:

• Property taxes
• Unemployment insurance taxes
• Corporate income taxes
• Sales taxes

According to the Tax Foundation, the states with the most favorable business tax climates are:

1. Wyoming
2. South Dakota
3. Alaska

The states with the worst business tax climates are:

1. New Jersey
2. New York
3. California

Can I Incorporate a Business in States with No Income Tax?

You can incorporate or register your business in another state. When you incorporate in another state, the company is subject to that state’s laws. So, for example, if you incorporate in Wyoming, does that mean you don’t have to pay income tax?

Unfortunately, that’s likely not the case. There’s a reason every business in the U.S. isn’t incorporated in Wyoming (or another low- or no-tax state). That’s because if you operate a pass-through entity (such as a sole proprietorship, LLC, or partnership) you are generally subject to income tax where you are working. Therefore, even if your LLC is incorporated in Florida, if you live and work in NY, you will be subject to NY income tax.

Be sure to discuss the decision with your attorney and accountant if you’re interested in incorporating in another state!

Wrapping Up: Your Next Move

There’s a saying in the tax planning world: don’t let the tax tail wag the dog. This means that while taking specific actions might provide tax savings, that shouldn’t be the driving factor in your decision. The dog (your overall business goals and financial situation) should be wagging the tail.

Taxes are just one factor in business decision-making. Choosing where to live or register your business is about finding the right balance between taxes, access to materials, infrastructure, or a skilled labor pool, and the quality of life you seek.

If crunching numbers and comparing tax codes sounds as appealing as a root canal, contact NewWay Accounting for a helping hand. We can help you estimate your state tax burden, ensuring you make informed decisions about where to plant your financial roots.