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A new study by a Washington D.C. think tank Tax Foundation examines the
role of attractive state business tax climates in the decision of where to
locate a business. They’ve created a State Tax Business Climate Index that
measures the “tax friendliness to business of each state’s tax system at the
beginning of 2004.” It is a comparative measure that can provide insights on
how the state tax system is “hampering the efforts of local entrepreneurs or
the possible entry of new businesses.”
The Index rewards states that have neutral tax code, where the tax system
creates a level playing field for all types of businesses -- be it small or
large; a startup or an existing business; capital intensive or service
intensive. Aside from neutrality, the Index ranks high the states that also
possess the following tax system characteristics:
- Low and flat rates
- Have tax systems that are simple and transparent
- Avoid double taxation
- Have statutory or constitutional restraints that
keep tax burdens low over time
In addition, the study states “the best states raise sufficient revenue
without imposing at least one of the three major state taxes—sales taxes,
personal income taxes and corporate income taxes.” According to the Index,
the top 10 states with the best state business tax climate are as follows:
- South Dakota
- Florida
- Alaska
- Texas
- New Hampshire
- Nevada
- Wyoming
- Colorado
- Washington
- Oregon
At the other end of the spectrum, the worst state tax codes tend to have:
- Complex, multi-rate corporate and individual income taxes with
above-average tax rates;
- Above-average sales tax rates that don’t exempt
business-to-business purchases;
- Complex, high-rate unemployment tax
systems; and
- High overall state tax collections with few tax or
expenditure controls.
The 10 states with the least hospitable business climates according to
the Index are:
- Hawaii
- New York
- Minnesota
- West Virginia
- Rhode Island
- Vermont
- Kentucky
- Arkansas
- Maine
- Wisconsin
The overall Index looks at the major features of a state’s tax system:
the corporate income tax, the individual income tax, the sales or gross
receipts tax, the unemployment insurance tax, and the state’s fiscal
balance. Overall, the index consists of 5 specific indexes, 10 sub-indexes,
33 categories and 109 variables.
Click here for a table showing the 2004 State Business Tax
Climate Index and Ranking
The complete report can be accessed at
http://www.taxfoundation.org/bp45.pdf
