The Tax Foundation’s most recent State Business Tax Climate Index lets taxpayers, policymakers, and business leaders gauge how well their state structures its tax system.
It’s worth noting though that a state’s overall ranking can be quite different than its ranking in five major tax categories:
- Corporate tax
- Individual income tax
- Sales tax
- Unemployment insurance tax
- Property tax
The common factor among the top 10 best states is the absence of a major tax, the report states. Every state levies property and unemployment insurance taxes. But several states forego at least one of the major taxes. Wyoming, Nevada, and South Dakota have no corporate or individual income tax, but Nevada levies gross receipts taxes. Alaska has no individual income or state sales tax; Florida skips the individual income tax; and New Hampshire, Montana, and Oregon have no sales tax.
So, why are Indiana and Utah in the top 10 best states even though they levy all of the major taxes? Because they tax with low rates on broad bases, the report states.
Here are the 10 most tax-friendly states for business by overall rankings:
2. South Dakota
7. New Hampshire
As for the bottom 10, these states “tend to have a number of shortcomings in common: complex, non-neutral taxes with comparatively high rates,” the report states. “New Jersey, for example, is hampered by some of the highest property tax burdens in the country, is one of just two states to levy both an inheritance tax and an estate tax, and maintains some of the worst-structured individual income taxes in the country.”
Here are the 10 least tax-friendly states for business:
44. Rhode Island
49. New York
50. New Jersey
At No. 11 on the overall list, North Carolina moved up from No. 41 last year and made the most dramatic improvement in the Index’s history, the report notes. The state’s No. 4 ranking in the corporate tax component marks the second-best ranking after Utah for any state that imposes a major corporate tax. (Rankings do not average to the total. States without a tax rank equally as No. 1, which explains Wyoming and South Dakota in the corporate tax category. There is no No. 2.)
Like North Carolina, most of the states have a range of rankings according to the major taxes. South Dakota, for example, saw a drop in energy-sector revenues that resulted in a sales tax rate increase from 4 to 4.5 percent. That dropped its ranking in the sales tax category from No. 27 to No. 32. But its lack of individual and corporate income taxes still puts it at No. 2 overall. The state’s sales tax is still a low rate, and its base includes a range of business inputs, the report states.
Maine (No. 30 overall) is another example. The Pine Tree State moved up one point from No. 26 to No. 25 in the individual component because it added a third bracket, which hurt the state’s score, but lowered rates, which improved its score. Rates were cut from 6.5 and 7.95 percent to three rates of 5.8, 6.75, and 7.15 percent.