The Best, and Worst, State Tax Climates for Business

When it comes to gaining or losing jobs, the Department of Labor (DoL) reports the most mass job relocations occur between U.S. states, rather than jobs moving out of the country entirely. As a result, it is vital that businesses, lawmakers and even citizens understand how their state’s business climate and environment compare with others, both regionally and nationally.


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A state’s business climate is built on taxes. Taxes build the infrastructure, the roads, schools and public services businesses and their employees depend on. Understanding a state’s business climate, however, means more than just knowing how much the state collects in taxes. It also means knowing how those taxes are collected. Every state tax law enacted or amended will, in some way, impact that state’s ability to compete with other states in the same region and across the country. In this age of global markets, it may even affect a state’s international competitiveness as a place to live and do business.

The 2007 edition of the State Business Tax Climate Index (SBTCI), released by the Tax Foundation on Wednesday, is designed to measure the competitiveness of each state’s tax system. The SBTCI places more than 100 variables into five component indexes measuring different sectors of the state's tax climate and calculates the state's total score based on the scores of the component indices. The component indexes are: Corporate Tax, Individual Income Tax, Sales Tax, Unemployment Insurance Tax, and Property Tax. The use of component indices allows the tax climates of states with widely varying tax structures to be compared on a level playing field by rewarding strong aspects of the state tax system, such as no individual income tax, and penalizing them on their weaker aspects, such as high sales tax levels.

Based upon these calculations, the ten states having the best tax climate are:

  1. Wyoming
  2. South Dakota
  3. Alaska
  4. Nevada
  5. Florida
  6. Texas
  7. New Hampshire
  8. Montana
  9. Delaware
  10. Oregon

According to the Tax Foundation’s 2007 State Business Tax Climate Index, the ten states having the worst tax climate are:
50. Rhode Island
49. Ohio
48. New Jersey
47. New York
46. Vermont
45. California
44. Nebraska
43. Iowa
42. Maine
41. Minnesota

In the global marketplace, American companies are often at a disadvantage. Not only are they subject to a federal corporate income tax with a top rate of 35 percent, states levy an additional tax burden on companies.

According to the SBTCI, the ideal tax system, regardless of level (local, state or federal), is “simple, transparent, stable, neutral to business activity and pro-growth." Further, good state tax systems levy low, flat rates on the broadest possible bases and treat all taxpayers equally.

The entire report is available at: www.taxfoundation.org/files/bp52.pdf.

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