Policymakers have the difficult task of generating adequate tax revenue without excessively hampering economic growth and employment. States can promote business in various ways, but the tax system is one of the key elements encouraging economic activity. According to The Tax Foundation, a think tank that advocates for lower taxes and a simpler tax code, some states remain much more tax friendly to business than others.
The Tax Foundation's 2015 State Business Tax Climate Index graded all 50 states on more than 100 different measures to reflect the climate of the states' tax structures to business. The states that, according to the group, have the best business tax climates generally have lower tax rates, including lower personal and corporate income taxes, and less complicated tax codes. Wyoming is the most tax-friendly state for business, while New Jersey was the least tax-friendly state.
While many may assume the corporate tax rate is the primary concern for companies, Scott Drenkard, economist and manager of state projects at The Tax Foundation, said,
"The main lesson from this report is that businesses and individuals are very connected. When we work, we work at business, or we own businesses." Further, for small businesses, which are frequently organized as LLCs, S corporations, and sole proprietors, taxes are levied through the individual income tax code rather than the corporate tax rate.
Several states don't levy a major tax. For example, five states levy no general sales tax, including three of the most tax-friendly states. Seven states have no individual income tax, six of which are also among the most tax-friendly states. While nine of the most tax-friendly states don't levy at least on major tax, the exception is Utah, which levies every kind of tax measured by the report but often at flat rates. Because The Tax Foundation considers flat rates more manageable, Utah still ranked among the most tax-friendly states.
At least one major tax is completely absent in nine of the most tax-friendly states.
High tax rates and the presence of certain kinds of taxes are not the only components that make a state's tax system favorable for business. The structure of the a tax — whether there is a single or multi-bracket income tax system, for example — is also an important component. So, too, is the the breadth of the tax base, which can be the number of transactions, assets, or individuals on whom the tax is assessed. Drenkard explained that "if you have a narrow tax base it means your rates have to be higher on everyone else who isn't getting tax carve outs."
Not all tax experts agree that The Tax Foundation's description of what makes a good business tax climate fairly reflects the attractiveness of a state for companies. Speaking to 24/7 Wall St., Matthew Gardener, executive director of the Institute on Taxation and Economic Policy, described fiscal policy as a two-sided coin. For fiscal policy, "the taxes we collect is on one side of the coin, but the public investments — the spending areas that taxes pay for — are on the other side." Gardner asserted that The Tax Foundation's approach considers only one side of the coin.
In fact, some of the states with favorable climates may offer residents fewer government benefits as a result of their low taxes. Gardner also added that states like Wyoming and Alaska have favorable tax climates for business because they can afford to do so. These states are able to raise huge sums of money through taxes on their large natural resources industries, and therefore do not need to collect as much tax revenue from incomes or sales.
According to figures from the Census Bureau's 2013 Annual Survey of State Government Tax Collections report, 78.3% of all tax collections in Alaska were from severance taxes, or taxes on production of oil and other hydrocarbons. This is the highest percentage in the country. In Wyoming, that figure was 39.7%. By comparison, nationwide, less than 2% of all state tax collections came from such taxes.
Based on The Tax Foundation's 2015 State Business Tax Climate Index, 24/7 Wall St. reviewed the 10 states with the best business tax environments and the 10 states with the worst business tax environments. Figures on various tax rates, bases, collections, and policies are from The Tax Foundation's report. Unemployment rates are from the Bureau of Labor Statistics (BLS) and represent annual averages for 2013. Figures on GDP growth are from the Bureau of Economic Analysis and are also as of 2013.
These are the least tax-friendly states.
State sales tax rate: 6.00% (tied-16th highest)
Property taxes collected per capita: $1,430 (18th highest)
Unemployment rate: 4.6% (6th lowest)
Top income tax rate: 8.98%
Iowa is the 10th least tax-friendly state for business, according to The Tax Foundation. Iowa scored second-lowest for corporate tax policies. This is largely because of the state's top corporate income tax rate of 12%, which is the highest nationwide. Iowa was also one of just eight states levying an alternative minimum tax (AMT) on corporations. While the tax was designed to ensure corporations paid a minimum tax each year, the tax adds complexity and is considered to be inefficient by The Tax Foundation. Most states with multiple-bracket income tax codes ensure inflation is accounted for in determining tax brackets. Iowa's system, however, is not indexed to inflation, one of only 16 states where peoples' tax rates might increase due to inflation alone.
State sales tax rate: 6.35% (11th highest)
Property taxes collected per capita: $2,580 (2nd highest)
Unemployment rate: 7.8% (13th highest)
Top income tax rate: 6.70%
Of the five categories reviewed by The Tax Foundation, Connecticut received its lowest score for property tax policies. The state collected nearly $2,600 in property taxes per resident in the most recent tax season, more than in all but one other state. Additionally, Connecticut was the only state to levy a gift tax. Gift taxes are often intended to prevent people from dodging the estate tax by giving their property away before they die. Connecticut also levies among the nation's highest excise taxes. Diesel fuel, for example, is taxed at 55 cents per gallon, higher than in any other state. And cigarettes taxes add an additional $3.40 to the cost of a pack, the fourth highest such
State sales tax rate: 5.00% (17th lowest)
Property taxes collected per capita: $1,724 (12th highest)
Unemployment rate: 6.7% (23rd lowest)
Top income tax rate: 7.65%
While beer is taxed just at six cents per gallon in Wisconsin, nearly the lowest beer tax nationwide, other excise taxes are remarkably high compared to other states. Gasoline and diesel are taxed at 33 cents per gallon, among the highest figures nationwide. Also, like most of the least tax-friendly states, tobacco is highly taxed, at $2.52 per pack of cigarettes, the 10th highest surcharge in the country. While Wisconsin's property tax policy was rated worse than most states, the state's property tax rank improved from the previous year after it recently repealed its inventory tax on rental property.
State sales tax rate: 5.75% (24th lowest)
Property taxes collected per capita: $1,140 (22nd lowest)
Unemployment rate: 7.4% (19th highest)
Top income tax rate: 5.33%
In most states, corporate taxes are levied on profits. Ohio, however, has a gross receipts tax, which The Tax Foundation considers to be especially harmful for many businesses. As a result, Ohio scored third worst in the corporate tax category. Ohio also fared among the worst in the individual income tax category because of its relatively large number of tax brackets, and for temporarily suspending bracket indexing, which adjusts the bracket thresholds for inflation. Like most of the least tax-friendly states for business, excise taxes are particularly high in Ohio. Gasoline and diesel, for example, are each taxed at 28 cents per gallon, among the highest rates nationwide. While most of Ohio's major tax policies scored very poorly, its unemployment insurance tax policies ranked better than all but four other states.
6. Rhode Island
State sales tax rate: 7.00% (tied-2nd highest)
Property taxes collected per capita: $2,161 (7th highest)
Unemployment rate: 9.5% (2nd highest)
Top income tax rate: 5.99%
Rhode Island residents each paid $2,161 in property taxes on average, or nearly 5% of a typical personal income, among the highest figures in the nation. The state's general sales tax rate of 7% is also higher than in the vast majority of states. In addition to sales taxes, consumers have to pay additional high excise taxes on certain goods. Gasoline and diesel, for instance, are each taxed at 33 cents per gallon, among the highest rates nationwide. In addition, while beer is taxed at just 11 cents per gallon — one of the lower beer tax rates — cigarettes are taxed at $3.50 per pack, higher than in all but two other states. Like all of the least tax-friendly states, Rhode Island's individual income tax system was rated worse than most. A reduction in the state's corporate income tax from 9% to 7% will not take effect until January 1, 2015, and is not reflected in The
Tax Foundation's report.
State sales tax rate: 6.00% (tied-16th highest)
Property taxes collected per capita: $2,197 (5th highest)
Unemployment rate: 4.4% (tied-4th lowest)
Top income tax rate: 8.95%
Vermont's sales tax system scored better than most states. However, with sales tax-free New Hampshire just across the Connecticut River, there may be more at stake for Vermont businesses, as residents can easily cross the border to make purchases in New Hampshire. According to a recent Tax Foundation report, per capita sales among border businesses in New Hampshire roughly tripled since the late 1950s, while per capita sales remained stagnant in Vermont's border counties. Property taxes in the state are also quite high. In the most recent tax season, Vermonters paid $2,197 on average in property taxes, or 5.3% of a typical personal income, both among the highest figures in the nation.
State sales tax rate: 6.88% (7th highest)
Property taxes collected per capita: $1,535 (16th highest)
Unemployment rate: 5.1% (9th lowest)
Top income tax rate: 9.85%
Minnesota's corporate and individual income tax policies are both rated among the worst in the nation. One reason is that Minnesota's corporate income tax rate of 9.8% is higher than in any other state. Only Washington, D.C. has a higher corporate income tax rate. Minnesota is also penalized for being one of eight states with an alternative minimum tax on corporations. Although this assures companies pay a minimum amount in taxes each year, it does so by creating a parallel tax structure that generates little revenue and adds to tax complexity, The Tax Foundation argues.
State sales tax rate: 7.50% (the highest)
Property taxes collected per capita: $1,426 (19th highest)
Unemployment rate: 8.9% (4th highest)
Top income tax rate: 13.30%
California is one of the least tax-friendly states for business in part because of the its policies on individual income taxes. One major reason is that top-earning taxpayers can expect to pay as much as 13.3% of their annual income in state income taxes. This top tax rate affects residents earning $1 million or more. California also has a so-called "marriage penalty," meaning that the standard deduction and tax bracket thresholds for a married couple filing a joint tax return are less than double what they would be if each spouse filed alone. California is also rated as one of the worst states for sales taxes. Its statewide sales tax rate of 7.5% is the highest in the nation.
2. New York
State sales tax rate: 4.00% (7th lowest)
Property taxes collected per capita: $2,338 (4th highest)
Unemployment rate: 7.7% (14th highest)
Top income tax rate: 8.82%
New York's corporate tax rank improved from a year ago due to the initial phasing-in of recent reforms. The rank is expected to continue to improve considerably after the reforms are fully implemented. Among the changes is the decline in the corporate tax rate from 7.1% to 6.5% once reforms are fully phased-in, and the elimination of the alternative minimum tax for businesses. However, New York still ranks as the second-worst state for individual income tax policy due to its high tax rates for top earners as well as for its income tax recapture provision. This provisions allows New York to "apply the rate of the top income tax bracket to previous taxable income after the taxpayer crosses the top bracket threshold," according to The Tax Foundation noted, rather than just taxing each dollar earned above the threshold at the new rate.
1. New Jersey
State sales tax rate: 7.00% (tied-2nd highest)
Property taxes collected per capita: $2,896 (the highest)
Unemployment rate: 8.2% (8th highest)
Top income tax rate: 8.97%
No state is less tax-friendly for business than New Jersey. The state collected nearly $3,000 per capita in property taxes, or 5.52% of a typical personal income, both the highest figures in the nation. New Jersey is also one of only two states with both an estate tax and an inheritance tax, which levies a tax on the heir of an estate in addition to taxing the estate itself. The Tax Foundation awarded states lower scores if they taxed multiple levels of the production process through a broad sales tax base. New Jersey is one of only a handful of states where sales on numerous business inputs — including utilities, services, and leases — are taxed. Additionally, while New Jersey's excise taxes on fuel are among the nation's lowest, the state's general sales tax of 7% is nearly the highest. Like a majority of the least tax-friendly states, New Jersey's economy is struggling somewhat, with an unemployment rate of 8.2% last year, versus the national rate of 7.4%.