2015 State Business Tax Climate Index

October 28, 2014

Click Here for 2016 Edition of the State Business Tax Climate Index

Executive Summary

The Tax Foundation’s State Business Tax Climate Index enables business leaders, government policymakers, and taxpayers to gauge how their states’ tax systems compare. While there are many ways to show how much is collected in taxes by state governments, the Index is designed to show how well states structure their tax systems, and provides a road-map to improving these structures.

The 10 best states in this year’s Index are:

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

The absence of a major tax is a common factor among many of the top ten states. Property taxes and unemployment insurance taxes are levied in every state, but there are several states that do without one or more of the major taxes: the corporate tax, the individual income tax, or the sales tax. Wyoming, Nevada, and South Dakota have no corporate or individual income tax; Alaska has no individual income or state-level sales tax; Florida has no individual income tax; and New Hampshire and Montana have no sales tax. 

But this does not mean that a state cannot rank in the top ten while still levying all the major taxes. Indiana and Utah, for example, have all the major tax types, but levy them with low rates on broad bases.

The 10 lowest ranked, or worst, states in this year’s Index are:

41. Iowa
42. Connecticut
43. Wisconsin
44. Ohio
45. Rhode Island
46. Vermont
47. Minnesota
48. California
49. New York
50. New Jersey

The states in the bottom ten suffer from the same afflictions: complex, non-neutral taxes with comparatively high rates. New Jersey, for example, suffers from some of the highest property tax burdens in the country, is one of just two states to levy both an inheritance and an estate tax, and maintains some of the worst structured individual income taxes in the country.

Table 1. 2015 State Business Tax Climate Index Ranks and Component Tax Ranks

 

Overall Rank

Corporate Tax Rank

Individual
Income
Tax Rank

Sales Tax Rank

Unemployment Insurance Tax Rank

Property Tax Rank

Alabama

28

27

23

41

25

10

Alaska

4

30

1

5

24

32

Arizona

23

24

19

49

4

6

Arkansas

39

40

28

44

39

19

California

48

34

50

42

14

14

Colorado

20

12

16

43

35

22

Connecticut

42

32

34

31

20

49

Delaware

14

50

33

1

2

13

Florida

5

14

1

12

3

16

Georgia

36

8

42

17

36

30

Hawaii

30

9

37

15

28

12

Idaho

19

21

24

22

46

3

Illinois

31

47

11

34

38

44

Indiana

8

22

10

10

7

5

Iowa

41

49

32

23

33

38

Kansas

22

38

18

30

9

28

Kentucky

26

29

30

11

45

17

Louisiana

35

23

27

50

6

24

Maine

33

45

22

9

42

40

Maryland

40

16

45

8

21

41

Massachusetts

24

37

13

21

48

45

Michigan

13

10

14

7

47

27

Minnesota

47

44

46

37

29

34

Mississippi

18

11

21

28

8

33

Missouri

17

4

29

29

12

7

Montana

6

18

20

3

18

8

Nebraska

29

31

25

27

13

39

Nevada

3

1

1

39

43

9

New Hampshire

7

48

9

2

44

43

New Jersey

50

41

48

48

32

50

New Mexico

38

35

35

45

10

1

New York

49

20

49

40

31

46

North Carolina

16

25

15

33

11

29

North Dakota

25

19

36

20

16

2

Ohio

44

26

47

32

5

20

Oklahoma

32

7

40

38

1

11

Oregon

12

36

31

4

30

15

Pennsylvania

34

46

17

24

50

42

Rhode Island

45

43

38

26

49

47

South Carolina

37

13

41

18

40

21

South Dakota

2

1

1

35

41

18

Tennessee

15

15

8

47

26

37

Texas

10

39

6

36

15

36

Utah

9

5

12

19

22

4

Vermont

46

42

44

16

17

48

Virginia

27

6

39

6

37

26

Washington

11

28

6

46

19

23

West Virginia

21

17

26

25

23

25

Wisconsin

43

33

43

14

27

31

Wyoming

1

1

1

13

34

35

District of Columbia

45

38

35

42

27

44

Note: 1 is best, 50 is worst. Rankings do not average to total. States without a tax rank equally as 1 for that component. D.C. score and rank do not affect other states. Report shows tax systems as of July 1, 2014 (the beginning of Fiscal Year 2015).

Source: Tax Foundation calculations.

Notable Ranking Changes in this Year’s Index

North Carolina
Perhaps the greatest testament to the value of the Index is its use as a success metric for comprehensive reforms passed last year in North Carolina. In this year’s edition, North Carolina has improved dramatically from 44th place last year to 16th place this year, the single largest rank jump in the history of the Index. The state improved its score in the corporate, individual, and sales tax components of the Index, and as the reform package continues to phase in, the state is projected to continue climbing the rankings. 

North Carolina’s largest improvement was in the individual income tax component section, where legislation restructured the previously multi-bracketed system with a top rate of 7.75 percent to a single-bracket system with a rate of 5.8 percent and a generous standard deduction of $7,500. This translates to an improvement of 27 rankings in the individual income tax component of the Index, with further improvement expected next year as the rate is expected to decrease again to 5.75 percent (see Table 4). 

The corporate income tax rate in North Carolina is also phasing down. The rate fell from 6.9 percent last year to 6 percent this year, improving the state’s ranking in that component from 30th to 25th (see Table 3). The rate is subject to a trigger mechanism that will further reduce the rate in future years when state general fund revenues are healthy, to as low as 3 percent by 2017. 

Finally, the state improved its sales tax structure this year by disallowing localities the ability to set their own tax bases, improving simplicity for sales tax filing. This improved the sales tax component from 47th to 33rd (see Table 5). 

Kansas

Despite income tax cuts that are phasing in, Kansas dropped three rankings overall, from 19th to 22nd, as North Carolina jumped several spaces, and West Virginia’s score continued to improve as property tax and corporate tax improvements phased in. 

Maine

Maine fell five rankings overall, from 28th to 33rd, primarily due to a sales tax rate increase but also partly due to improvements in the relative rankings of North Carolina and Nebraska. 

Nebraska

Nebraska improved five ranks overall, from 34th place to 29th, due to improvements in its corporate and individual income tax systems, including reform of corporate net operating loss carryforwards, a repeal of the individual alternative minimum tax, and indexation of the brackets of the individual income tax code. 

New York

New York’s corporate income tax ranking improved from 24th to 20th as a result of corporate tax reform passed this year that is starting to phase in (see Table 3). Once fully phased in, the package will lower the corporate rate from 7.1 to 6.5 percent, eliminate the capital stock tax and corporate alternative minimum tax, extend net operating loss carrybacks from 2 to 3 years, and remove the carryback cap. Once fully phased in, the corporate tax component of the Index is expected to improve to 4th place. 

North Dakota

North Dakota improved from 27th to 25th overall due to a cut in the top individual income tax rate from 3.99 percent to 3.22 percent. 

Wisconsin

Though Wisconsin’s overall rank did not change for this edition of the Index, the state repealed its inventory tax on rental property, improving its property tax component score from 36th to 31st (see Table 6), and conformed mineral depletion to federal schedules, improving its corporate tax component score from 34th to 33rd (see Table 3). 

Recent and Proposed Changes Not Reflected in the 2015 State Business Tax Climate Index

The 2015 Index includes those tax changes in effect as of the snapshot date of July 1, 2014, the start of most states’ 2015 fiscal year. Expected future changes not captured in this year’s ranking are listed below. 

Arizona

Arizona is in the process of phasing down its corporate income tax (which currently stands at 6.5 percent) to 4.9 percent in stages between 2015 and 2018. Once implemented, these reductions will improve Arizona’s score on corporate income tax. 

Illinois

In 2011, Illinois sharply raised individual and corporate income taxes in an attempt to mitigate budget problems. The tax hikes are scheduled to be temporary and partially sunset at the beginning of tax year 2015, though the legislature examined extending them or increasing taxes in other ways this year. In 2015, the individual income tax is scheduled to decrease from 5 percent to 3.75 percent (it stood to 3 percent pre-2011), and the corporate tax is scheduled to decrease from 9.5 percent to 7.75 percent (it stood at 7.3 percent pre-2011). 

Indiana

Due to legislation passed this year, the Indiana corporate income tax is scheduled to be reduced from 7 percent to 4.9 percent by 2021. These reductions will continue to improve Indiana’s score on corporate income tax. Additionally, Indiana is in the process of phasing in moderate cuts to its individual income tax rate. The rate will fall from 3.4 percent to 3.3 percent in tax year 2015, and 3.23 percent in 2017. Once fully phased in, these changes are expected to improve Indiana’s overall rank to 7th. 

Kansas

Kansas is in the process of phasing out its income tax using a trigger mechanism that applies any additional general fund receipts over 2 percent growth from the previous year toward rate reduction. 

Missouri

This year, Missouri policymakers passed an income tax reduction that phases down the top rate from 6 percent to 5.5 percent by 0.1 percent each year starting in 2017, dependent on a revenue trigger. These changes will be reflected in the 2018 Index

New Mexico

The New Mexico corporate income tax rate is in the process of phasing down to 5.9 percent by 2018. For this Index edition, it stands at 7.3 percent. The rate reduction was accomplished in part by tightening the jobs credit and film credit. New Mexico currently has the highest corporate tax rate among its neighbors, and this cut will improve its corporate income tax component score. 

New York

New York policymakers enacted a substantial corporate tax reform this year that eliminates the individual and corporate alternative minimum taxes for this edition of the Index, and once fully phased in will lower the corporate rate from 7.1 percent to 6.5 percent, eliminate the capital stock tax, extend net operating loss carrybacks from two to three years, and remove the carryback cap. Once fully phased in, the corporate tax component of the Index is expected to improve to 4th place. 

North Carolina

North Carolina is in the process of phasing in its historic tax reform passed in 2013 that fundamentally restructured the state’s tax code. The individual income tax, which was restructured from a multi-rate system with a top rate of 7.75 percent, was restructured to a single 5.8 percent rate this year, and is scheduled for further reduction to 5.75 percent in tax year 2015. The corporate rate, which was reduced from 6.9 percent to 6 percent for this edition of the Index, will be further reduced to 5 percent, with potential trigger cuts that may bring the rate as low as 3 percent by 2017. 

Pennsylvania

Pennsylvania continues to phase out its capital stock tax, but while the tax was supposed to be eliminated in 2014, policymakers have extended the length of the phaseout until 2016. The rate is 0.067 percent in calendar year 2014, and will be 0.045 percent in 2015. 

Rhode Island

This year, Rhode Island policymakers approved a reduction in the state’s corporate income tax rate from 9 percent to 7 percent which will take effect on January 1, 2015. 

West Virginia

West Virginia’s business franchise tax (or capital stock tax) is expected to phase out fully next year. The rate currently stands at 0.1 percent, and has been on a phase-down schedule with the state’s corporate tax rate since 2011. The corporate rate has completed its phase-down schedule this year, having been reduced from 8.5 percent in 2011 to 6.5 percent this year. 

District of Columbia

The D.C. Council passed an impressive tax reform package this year which lowered individual income taxes for middle income brackets, cut the corporate rate, expanded the sales tax base, and raised the estate tax exemption. The District’s corporate tax rate is scheduled to decrease from 9.975 percent to 8.25 percent between now and 2019. These provisions will improve the District’s overall score. 

 

Introduction

While taxes are a fact of life, not all tax systems are created equal. One measure, total taxes paid, is relevant, but other elements of a state tax system can also enhance or harm the competitiveness of a state’s business environment. This Index boils down fifty complicated state business tax systems into one easy-to-use ranking.

The modern market is characterized by mobile capital and labor, with all types of businesses, small and large, tending to locate where they have the greatest competitive advantage. The evidence shows that states with the best tax systems will be the most competitive at attracting new businesses and most effective at generating economic and employment growth. It is true that taxes are but one factor in business decision making. Other concerns, such as raw materials or infrastructure or a skilled labor pool, matter, but a simple, sensible tax system can positively impact business operations with regard to these resources. Furthermore, unlike changes to a state’s healthcare, transportation, or education systems, which can take decades to implement, changes to the tax code can quickly improve a state’s business climate. 

It is important to remember that even in our global economy, states’ stiffest and most direct competition often comes from other states. The Department of Labor reports that most mass job relocations are from one U.S. state to another rather than to a foreign location. Certainly job creation is rapid overseas, as previously underdeveloped nations enter the world economy without facing the highest corporate tax rate in the industrialized world, as U.S. businesses do. State lawmakers are right to be concerned about how their states rank in the global competition for jobs and capital, but they need to be more concerned with companies moving from Detroit, MI, to Indianapolis, IN, rather than from Detroit to New Delhi. This means that state lawmakers must be aware of how their states’ business climates match up to their immediate neighbors and to other states within their regions. 

Anecdotes about the impact of state tax systems on business investment are plentiful. In Illinois early last decade, hundreds of millions of dollars of capital investments were delayed when then-Governor Rod Blagojevich proposed a hefty gross receipts tax. Only when the legislature resoundingly defeated the bill did the investment resume. In 2005, California-based Intel decided to build a multi-billion dollar chip-making facility in Arizona due to its favorable corporate income tax system. In 2010, Northrup Grumman chose to move its headquarters to Virginia over Maryland, citing the better business tax climate. Anecdotes such as these reinforce what we know from economic theory: taxes matter to businesses, and those places with the most competitive tax systems will reap the benefits of business-friendly tax climates.

Tax competition is an unpleasant reality for state revenue and budget officials, but it is an effective restraint on state and local taxes. It also helps to more efficiently allocate resources because businesses can locate in the states where they receive the services they need at the lowest cost. When a state imposes higher taxes than a neighboring state, businesses will cross the border to some extent. Therefore, states with more competitive tax systems score well in the Index, because they are best suited to generate economic growth.

State lawmakers are always mindful of their states’ business tax climates, but they are often tempted to lure business with lucrative tax incentives and subsidies instead of broad-based tax reform. This can be a dangerous proposition, as the example of Dell Computers and North Carolina illustrates. North Carolina agreed to $240 million worth of incentives to lure Dell to the state. Many of the incentives came in the form of tax credits from the state and local governments. Unfortunately, Dell announced in 2009 that it would be closing the plant after only four years of operations. A 2007 USA Today article chronicled similar problems other states have had with companies that receive generous tax incentives.

Lawmakers create these deals under the banner of job creation and economic development, but the truth is that if a state needs to offer such packages, it is most likely covering for a woeful business tax climate. A far more effective approach is to systematically improve the business tax climate for the long term to improve the state’s competitiveness. When assessing which changes to make, lawmakers need to remember two rules:

Taxes matter to business. Business taxes affect business decisions, job creation and retention, plant location, competitiveness, the transparency of the tax system, and the long-term health of a state’s economy. Most importantly, taxes diminish profits. If taxes take a larger portion of profits, that cost is passed along to either consumers (through higher prices), employees (through lower wages or fewer jobs), or shareholders (through lower dividends or share value). Thus, a state with lower tax costs will be more attractive to business investment and more likely to experience economic growth.

States do not enact tax changes (increases or cuts) in a vacuum. Every tax law will in some way change a state’s competitive position relative to its immediate neighbors, its geographic region, and even globally. Ultimately, it will affect the state’s national standing as a place to live and to do business. Entrepreneurial states can take advantage of the tax increases of their neighbors to lure businesses out of high-tax states. 

In reality, tax-induced economic distortions are a fact of life, so a more realistic goal is to maximize the occasions when businesses and individuals are guided by business principles and minimize those cases where economic decisions are influenced, micromanaged, or even dictated by a tax system. The more riddled a tax system is with politically motivated preferences, the less likely it is that business decisions will be made in response to market forces. The Index rewards those states that apply these principles.

Ranking the competitiveness of fifty very different tax systems presents many challenges, especially when a state dispenses with a major tax entirely. Should Indiana’s tax system, which includes three relatively neutral taxes on sales, individual income, and corporate income, be considered more or less competitive than Alaska’s tax system, which includes a particularly burdensome corporate income tax but no statewide tax on individual income or sales? 

The Index deals with such questions by comparing the states on over 100 different variables in the five important areas of taxation (corporate taxes, individual income taxes, sales taxes, unemployment insurance taxes, and property taxes) and then adding the results up to a final, overall ranking. This approach rewards states on particularly strong aspects of their tax systems (or penalizes them on particularly weak aspects) while also measuring the general competitiveness of their overall tax systems. The result is a score that can be compared to other states’ scores.

 

Table 2. State Business Tax Climate Index, 2012—2015

 

2012 Rank

2012 Score

2013 Rank

2013 Score

2014 Rank

2014 Score

2015 Rank

2015 Score

Change from 2014 to 2015

Rank

Score

Alabama

25

5.11

26

5.10

25

5.10

28

5.02

-3

-0.08

Alaska

4

7.31

4

7.26

4

7.23

4

7.22

0

-0.01

Arizona

26

5.08

27

5.07

22

5.17

23

5.12

-1

-0.05

Arkansas

31

4.93

33

4.89

37

4.78

39

4.68

-2

-0.10

California

48

3.76

48

3.67

48

3.76

48

3.77

0

+0.01

Colorado

17

5.36

19

5.28

20

5.21

20

5.27

0

+0.06

Connecticut

40

4.48

42

4.43

41

4.49

42

4.47

-1

-0.02

Delaware

13

5.58

14

5.60

14

5.58

14

5.53

0

-0.05

Florida

5

6.87

5

6.83

5

6.89

5

6.91

0

+0.02

Georgia

34

4.89

36

4.83

35

4.81

36

4.78

-1

-0.03

Hawaii

33

4.91

31

4.93

30

5.00

30

5.00

0

0.00

Idaho

18

5.27

18

5.30

18

5.31

19

5.27

-1

-0.04

Illinois

29

5.03

30

4.97

29

5.00

31

4.96

-2

-0.04

Indiana

11

5.89

10

5.85

8

5.99

8

5.96

0

-0.03

Iowa

39

4.52

39

4.53

39

4.53

41

4.50

-2

-0.03

Kansas

24

5.12

25

5.10

19

5.21

22

5.17

-3

-0.04

Kentucky

22

5.16

21

5.15

24

5.12

26

5.04

-2

-0.08

Louisiana

32

4.92

32

4.89

32

4.87

35

4.83

-3

-0.04

Maine

37

4.77

29

5.00

28

5.00

33

4.89

-5

-0.11

Maryland

42

4.40

40

4.49

40

4.51

40

4.50

0

-0.01

Massachusetts

20

5.17

23

5.12

23

5.14

24

5.08

-1

-0.06

Michigan

27

5.06

13

5.71

13

5.74

13

5.64

0

-0.10

Minnesota

44

4.26

45

4.27

47

4.08

47

4.07

0

-0.01

Mississippi

16

5.37

17

5.32

17

5.33

18

5.29

-1

-0.04

Missouri

15

5.50

16

5.48

16

5.48

17

5.41

-1

-0.07

Montana

6

6.28

6

6.25

6

6.25

6

6.21

0

-0.04

Nebraska

35

4.87

34

4.88

34

4.85

29

5.02

+5

+0.17

Nevada

3

7.43

3

7.40

3

7.46

3

7.46

0

0.00

New Hampshire

7

6.22

7

6.07

7

6.08

7

6.01

0

-0.07

New Jersey

50

3.44

49

3.49

50

3.44

50

3.43

0

-0.01

New Mexico

38

4.73

38

4.71

38

4.77

38

4.75

0

-0.02

New York

49

3.51

50

3.45

49

3.47

49

3.62

0

+0.15

North Carolina

45

4.25

44

4.27

44

4.32

16

5.44

+28

+1.12

North Dakota

28

5.04

28

5.05

27

5.05

25

5.08

+2

+0.03

Ohio

43

4.35

43

4.39

42

4.45

44

4.41

-2

-0.04

Oklahoma

30

4.94

35

4.87

33

4.86

32

4.91

+1

+0.05

Oregon

12

5.64

12

5.78

12

5.78

12

5.74

0

-0.04

Pennsylvania

21

5.16

22

5.13

31

4.96

34

4.89

-3

-0.07

Rhode Island

46

4.24

47

4.18

45

4.18

45

4.14

0

-0.04

South Carolina

36

4.82

37

4.82

36

4.80

37

4.76

-1

-0.04

South Dakota

2

7.52

2

7.53

2

7.50

2

7.50

0

0.00

Tennessee

14

5.56

15

5.52

15

5.52

15

5.48

0

-0.04

Texas

9

5.98

9

5.86

10

5.85

10

5.80

0

-0.05

Utah

8

6.01

8

5.96

9

5.98

9

5.91

0

-0.07

Vermont

47

4.16

46

4.19

46

4.15

46

4.11

0

-0.04

Virginia

23

5.13

24

5.11

26

5.06

27

5.03

-1

-0.03

Washington

10

5.95

11

5.83

11

5.82

11

5.79

0

-0.03

West Virginia

19

5.18

20

5.19

21

5.19

21

5.19

0

0.00

Wisconsin

41

4.44

41

4.46

43

4.42

43

4.46

0

+0.04

Wyoming

1

7.65

1

7.63

1

7.57

1

7.58

0

+0.01

District of Columbia

40

4.49

44

4.31

44

4.36

45

4.32

-1

-0.04

Note: 1 is best, 50 is worst. All scores are for fiscal years. D.C. score and rank do not affect other states.

Source: Tax Foundation.

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