Taxes are necessary for a functioning government, but according to one group, many states are crippling regional business growth with tax structures that are too expensive or complex.
The Tax Foundation’s 2014 State Business Tax Climate Index graded all 50 states based on more than 100 measures that reflect how competitive a state’s tax policies are to both large and small businesses. The report considered state income, corporate, property, sales and unemployment insurance tax policies. As was the case last year, Wyoming had the best business tax climate in the country, while New York had the worst. Based on the Tax Foundation’s report, these are the least tax-friendly states for business.
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As might be expected, several of the states rated best for business have among the lowest corporate tax rates in the country. However, a number of states with much higher corporate tax rates are also among the most tax-friendly for business, according to Tax Foundation data. Alaska and New Hampshire, for example, had the first- and second-highest corporate tax collections per capita in fiscal 2011, respectively, but they still made the list.
States with high corporate tax rates ranked higher overall because they scored much better in other forms of taxes. Alaska levies no personal income tax, while New Hampshire has no sales tax.
The Tax Foundation considered other taxes in addition to corporate taxes because it believes all taxes affect a state’s business environment. Tax Foundation economist Scott Drenkard explained that the report included income taxes, for example, because 94% of all business filings are through this tax, and not corporate taxes.
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Drenkard also added that personal income tax and the other taxes considered affect businesses’ ability to attract employees. “Individual income taxes matter because businesses are trying to attract labor to their state. If the choice is between New York City, which has as high as a 12% income tax, and, say, Charlotte, North Carolina, where you have much more moderate income tax burdens, all else equal, people might go with the lower-tax option.”
Another important factor in the rankings is the simplicity of states’ tax codes. One way of ensuring this, Drenkard explained, is by eliminating certain taxes altogether. Of the 10 top-ranked states, eight eschew at least one of the major taxes. Wyoming has no individual income tax or corporate income tax. “Going without one of the individual taxes means that all of that overhead cost, all of that economic waste associated with tax compliance, goes away.”
A review of the states with the best taxes for business does appear to show a healthier economy and lower unemployment. As of August, unemployment was lower than the U.S. rate of 7.3% in eight of the 10 states. Seven of the 10 states with the worst tax policy for business, on the other hand, had higher rates.
However, that the states with best tax climates have stronger economies may have less to do with their tax structure and more to do with abundant natural resources. Wyoming, Alaska, Utah and Montana all benefit from substantial oil, natural gas, coal or other mineral reserves. Drenkard noted that this natural advantage is the reason they are able to levy less harsh taxes in the first place.
Not all groups agree with the Tax Foundation’s assessment that higher and more taxes hurt state businesses. Carl Davis, senior analyst at the Institute on Taxation and Economic Policy, said, “The problem is that when you look at taxes in isolation -- counting the number of dollars that come in -- you miss the reason states are collecting taxes in the first place: to fund government services.”
As an example, Davis gave Maryland, which recently raised the gas tax rate to improve its roads and bridges. “This will likely hurt the state on the Tax Foundation’s business climate rankings, but one of the reasons the state raised the tax was that businesses were clamoring for it," said Davis. "Businesses recognized that a well-funded infrastructure that’s not falling apart and can get employees to jobs on time and move products around the state efficiently is tremendously important to their bottom line.”
Based on the Tax Foundation’s 2014 State Business Tax Climate Index, 24/7 Wall St. reviewed the 10 states with the best and worst business tax environments. Unemployment rates are from the Bureau of Labor Statistics for August 2013. State debt and revenue figures are from the Tax Foundation for fiscal 2011, the most recent available year. Income, poverty, employment composition and state expenditure data are from the U.S. Census Bureau’s 2012 American Community Survey.
These are the least tax-friendly states for business.
> Taxes collected per capita: $2,756 (15th highest)
> Unemployment: 7.0% (22nd lowest)
> Corporate taxes collected per capita: $134 (19th highest)
> Sales tax rate: 6.00% (tied for 16th highest)
The Tax Foundation rated Maryland as one of the worst states for business, largely because it received low grades for its tax policies on individual income, unemployment insurance and property taxes. In 2011, residents paid $1,144 per capita in state income taxes. In addition to income tax, the state ranks among the worst third in the country for gas and cigarette taxes. Maryland also has especially high levels of income inequality. It has very high incomes in the suburbs around Baltimore and, especially, Washington, D.C., but it has large pockets of residents living below the poverty level.
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> Taxes collected per capita: $3,754 (5th highest)
> Unemployment: 8.1% (tied for 13th highest)
> Corporate taxes collected per capita: $188 (10th highest)
> Sales tax rate: 6.35% (11th highest)
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While Connecticut’s different taxes scored poorly across the board, it is the state’s property tax policies that were the biggest problem, ranking second worst in the country. The state also has an income recapture policy that, according to the Tax Foundation, allows it to “apply the rate of the top income tax bracket to previous taxable income after the taxpayer crosses the top bracket threshold.” Connecticut's median income ranks in the top five nationally; nearly 12% of households reported an annual income of $200,000 or more.
> Taxes collected per capita: $2,692 (17th highest)
> Unemployment: 6.7% (19th lowest)
> Corporate taxes collected per capita: $149 (16th highest)
> Sales tax rate: 5.00% (17th lowest)
Wisconsin's policies on individual income tax were rated as one of the worst in the nation. However, the state has taken actions that should result in an improved score going forward. These include decreasing the top individual income tax rate from 7.75% to 7.65%, and reducing the number of income tax brackets from five to four. The state's corporate income tax rate is a flat 7.9%, and its policy toward corporate income taxes received a mediocre grade from the Tax Foundation. Property tax collections were, per capita, among the highest in the nation.
7. North Carolina
> Taxes collected per capita: $2,332 (24th lowest)
> Unemployment: 8.7% (tied for 6th highest)
> Corporate taxes collected per capita: $114 (25th highest)
> Sales tax rate: 4.75% (16th lowest)
North Carolina's overall ranking will improve in the years ahead, the Tax Foundation says, as a result of a Republican-controlled legislature enacting a package of wide-reaching reforms. The state's individual income tax policy will move from a graduated system, with a top rate of 7.75%, to a flat rate of 5.8% in 2014. The corporate income tax rate also will fall from 6.9% to 3%. The head of the North Carolina Senate Finance Committee wants to do away with the income tax altogether. The North Carolina Justice Center says the 2013 tax cuts will hurt public schools and the state's well-respected universities.
> Taxes collected per capita: $4,293 (4th highest)
> Unemployment: 4.6% (tied for 5th lowest)
> Corporate taxes collected per capita: $168 (11th highest)
> Sales tax rate: 6.00% (tied for 16th highest)
Vermont’s sales tax policy is fairly well-rated. Its average total sales tax paid was lower than half of all other states. But the state’s corporate and personal income tax policies are among the nation's worst, according to the Tax Foundation. Its property tax policy received an even lower rating -- the state’s effective property tax rate equals 5.3% of income. The state also has among the highest cigarette and gas tax rates in the United States.
5. Rhode Island
> Taxes collected per capita: $2,603 (18th highest)
> Unemployment: 9.1% (3rd highest)
> Corporate taxes collected per capita: $141 (18th highest)
> Sales tax rate: 7.00% (tied for 2nd highest)
Rhode Island received a poor grade in part because of its high corporate income tax rate, as well as some of the nation’s highest effective property tax rates. The state also had the worst-rated unemployment insurance tax policy in the country. According to the Tax Foundation, Rhode Island needs to cut taxes to make it more competitive. Governor Lincoln Chafee proposed cutting the state’s corporate income tax rate from 9% to 7%, but the plan eventually was rejected.
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> Taxes collected per capita: $3,557 (6th highest)
> Unemployment: 5.1% (10th lowest)
> Corporate taxes collected per capita: $188 (9th highest)
> Sales tax rate: 6.88% (7th highest)
Minnesota’s legislature increased its top individual income tax rate from 7.85% to 9.85% in May. Along with the state’s already poor rankings for corporate, individual income and unemployment insurance taxes, this change helped make Minnesota one of the least tax-friendly states for business. While Minnesota’s unfriendly tax climate would suggest it could kill business, the state’s economy recovered especially well since the recession. The state’s unemployment rate was 5.1% in August, compared with 7.3% nationally.
> Taxes collected per capita: $3,111 (11th highest)
> Unemployment: 8.9% (5th highest)
> Corporate taxes collected per capita: $256 (5th highest)
> Sales tax rate: 7.50% (the highest)
California has, according to the Tax Foundation, the worst individual income tax policy in the nation. The state has the highest top income tax in the United States, at 13.3%. It also has a graduated, rather than flat-rate, income tax system. Also, after combining the state sales tax and the average locally set sales taxes, California has the nation’s highest state sales tax rate as well. California was among the most damaged states by the recession. In 2012, Governor Jerry Brown succeeded in winning voter approval of tax increases on the wealthy that prevented massive cuts to school and university funding.
2. New Jersey
> Taxes collected per capita: $3,085 (12th highest)
> Unemployment: 8.5% (tied for 8th highest)
> Corporate taxes collected per capita: $252 (6th highest)
> Sales tax rate: 7.00% (tied for 2nd highest)
New Jersey is usually neck-and-neck with neighboring New York as the least tax-friendly state for business, according to the Tax Foundation. In this year’s ranking, New York fared worse than New Jersey, but only barely. New Jersey’s property tax policy ranked dead last, and the state collected $2,896 per capita in property taxes, the largest sum in the country. Its corporate income tax policies and individual income tax policies also ranked among the worst in the country.
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1. New York
> Taxes collected per capita: $3,497 (8th highest)
> Unemployment: 7.6% (18th highest)
> Corporate taxes collected per capita: $207 (8th highest)
> Sales tax rate: 4.00% (tied for 7th lowest)
The great irony about New York -- the least tax-friendly state for business -- is that New York City by itself is a world trade and finance center. However, the according to the Tax Foundation, the state’s tax policies are the worst in the state for keeping or attracting business. New York ranked worst in the country for receiving among the worst grades for unemployment insurance taxes and property taxes. The state’s corporate tax rate was actually rated 25th, but New York is dragged down by one of the worst scores for property, unemployment insurance and individual income taxes. In fiscal 2011, the state collected $1,864 in income taxes per capita. This was more than $1,000 above the U.S. average.
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