Hate Paying Income Tax? These 7 States Don't Have Any

By Matthew Frankel Markets Fool.com

Nobody likes paying taxes, right? While many U.S. states have rather high income tax rates, there are seven that have no state income tax whatsoever and another two that don't tax wage income. Here are your choices if you want to live somewhere without an income tax and some thoughts on whether a lack of an income tax is really as good as it sounds.

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1. Alaska

Not only does Alaska not have a state income tax, but it has no state sales tax, either. Instead, Alaska finances its expenses with the revenue generated by its natural resources. Better yet, every Alaska resident also receives a share of the state's royalty income, which was reduced by more than half in 2016 to a still-significant $1,022 per person.

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2. Florida

Florida relies on sales taxes to fund its operations, much of which comes in from the state's many tourists. In addition, Florida's property tax rates are higher than the national average.

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3. Nevada

Nevada is also reliant on sales taxes to fund its government, and gets a lot of its revenue from gambling-related taxes. In fact, Nevada's gaming and live entertainment taxes combine to nearly as much as the sales tax collected each year.

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4. South Dakota

Unlike many other states without an income tax, South Dakota also has one of the lowest (4%) sales tax rates. Instead, the state relies on other revenue streams, particularly excise taxes and and video lottery revenue.

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5. Texas

Texas gets its government revenue from sales taxes, and also collects substantial royalties on the state's oil and gas production. In addition, Texas has a higher-than-average property tax rate that helps make up for the difference.

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6. Washington

Washington voters were given the opportunity to implement a state income tax in 2010, but shot down the proposal. Instead of paying income tax, it seems Washington residents are content with the above-average sales tax and one of the highest gasoline taxes in the country.

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7. Wyoming

Like Alaska, much of Wyoming's revenue comes from its natural resources, particularly coal mining, as well as from some other interesting sources. One interesting fact is that Wyoming leads the nation in hunting license revenue, bringing in an average of $59 for every man, woman, and child in the state.

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Two more that are close

In addition to these seven states, it's important to point out that two more states (Tennessee and New Hampshire) don't tax earned income, although they do tax interest income and dividends. So, while residents of these states who get all of their income from a paycheck don't have to worry about paying income tax, those who get income from their investments do.

However, Tennessee is going to become the eighth tax-free state in the year 2022. The 6% tax rate on interest and dividend income is being reduced by 1% per year, which started in 2016.

The million-dollar question: Is no income tax really such a good thing?

As you can see from this list, other than Alaska and Wyoming, which get significant revenue from natural resource royalties, the U.S. states without income taxes make up for the loss of revenue in other ways. Sales taxes are the most common way, but many states find some creative ways to boost their revenues without appearing to raise taxes, such as Washington's gasoline tax.

So, what's the overall effect of living in an income tax-free state? Generally speaking, it's a good thing if you're rich, but not if you're in the lower- to middle-income brackets.

The problem with substituting sales and other taxes for a state income tax is that it tends to create a regressive tax system, which means that those toward the bottom pay more of their income, while those at the top pay less. This is in direct contrast to most income tax systems, which impose higher rates on higher earners and lower rates (or no tax at all) on lower-income households.

In fact, an analysis by Bankrate found that four of the five most regressive tax systems in the U.S. exist in states where there is no income tax -- Washington, Florida, South Dakota, and Texas.

The bottom line is although you might feel like you're saving money, living in a state without an income tax could actually result in your paying a greater percentage of your income to taxes.

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Matthew Frankel has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.