Study Reveals Which States Have Business-Friendly Tax Codes, Which Don't

March 10, 2006

For immediate release
For more information, contact the press office at (202) 464-6200.

Washington, D.C.—The ten states with the most business-friendly tax systems this year are: Wyoming, South Dakota, Alaska, Florida, Nevada, New Hampshire, Texas, Delaware, Montana and Oregon.

This ranking comes from the third edition of the Tax Foundation’s State Business Tax Climate Index, by Foundation economist Curtis S. Dubay and Scott A. Hodge, President of the Tax Foundation. The study ranks the 50 states on how “business friendly” their tax systems are, providing a roadmap for state lawmakers concerned with keeping their states tax-competitive. (Click here for audio of the media conference call announcing the study's release.) 

“Every one of the best tax systems raises sufficient revenue without imposing at least one of the three major state taxes—sales taxes, personal income taxes and corporate income taxes,” said Dubay.

The ten states with the least hospitable business tax climates are: New York, New Jersey, Rhode Island, Ohio, Vermont, Maine, Kentucky, Nebraska, Iowa and Arkansas.

“States do not enact tax changes in a vacuum,” said Hodge. “Every tax change will affect a state’s competitive position relative to its neighbors, as well as globally.”

The goal of the index is to focus lawmakers on good tax fundamentals in their states, rather than short-term tax abatements and exemptions designed to temporarily lure high-profile companies, baseball teams, and auto plants from other states.

“The temptation is for state lawmakers to lure high-profile companies with packages of tax bonuses,” said Hodge, “but that strategy can backfire.”

For example, in 2000 officials in Columbus, Ohio, lured a moving company with a 5-year package of tax goodies. In 2004, the company had not only failed to add 100 jobs as promised, but it had actually fired 98 employees, sending lawmakers into a panic to yank the final year of tax breaks.

“Ohio’s experience shows preferential tax bonuses don’t guarantee jobs will stay permanently,” said Hodge. “Often they mask deeper flaws in state taxes. The Tax Foundation’s new State Business Tax Climate Index helps draw those to lawmakers’ attention.”

Even states with excellent business tax climates trot out extra tax incentives. In 1996 Florida lawmakers lured a major credit card company to open a call center with a generous $4 million tax refund package. Eight years later lawmakers were shocked at the announcement that the company was closing the Tampa call center and laying off 1,100 workers.

Generally the index rewards tax codes that are neutral; that is, they have low, flat tax rates that apply to everyone. This makes tax law simpler and more transparent and avoids double taxation. Tables 1 and 2 below show the overall results.

The worst state tax codes tend to have:

• complex, multi-rate corporate and individual income taxes;
• above-average sales tax rates that don’t exempt business-to-business purchases;
• complex, high-rate unemployment tax systems; and
• high effective property tax rates, as well as a host of other wealth-based taxes.

“The ideal tax system, whether at the state, federal, or international level, should be neutral to business activity,” said Dubay. “In such a system, people would base their economic decisions on the merits of the transactions rather than the tax implications.”

How it Works
The methodology of the State Business Tax Climate Index is centered on the idea of tax competition, and each state’s final score depends on a comparison with the other 49 states.

The overall index is composed of five specific indexes devoted to major features of a state’s tax system: the state’s principal business tax, usually the corporate income tax; the individual income tax; the sales or gross receipts tax; the unemployment insurance tax, and the state’s system for taxing assets, principally the property tax. These five component indexes are themselves composed of several sub-indexes, and a total of 123 variables are taken into account in each state’s tax system.

Each state’s laws and tax collections were assessed as of the beginning of the 2006 fiscal year, which for the states was July 1, 2005. Therefore, the rankings reflect the business tax climate at that time, and do not consider legislative action since then. While the index is comprehensive, it is not exhaustive. Future research into state taxation will lead to new variables and sub-indexes in future editions of the index.

Best known for its annual calculation of Tax Freedom Day®, the Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.

Major Components of the State Business Tax Climate Index, 2006

State

Overall

Rank

Business Tax Index Rank

Individual Income Tax Index Rank

Sales and Gross Receipts Tax Index Rank

Unemployment Insurance Tax Index Rank

Wealth and Property Tax Index Rank

Alabama

14

14

17

11

4

6

Alaska

3

48

4

1

43

18

Arizona

25

29

20

40

12

12

Arkansas

41

44

32

37

41

13

California

40

39

47

38

20

7

Colorado

12

6

14

26

21

14

Connecticut

39

16

19

33

26

50

Delaware

8

25

26

3

11

10

Florida

4

13

4

20

1

16

Georgia

21

8

27

7

32

27

Hawaii

33

26

44

43

22

3

Idaho

24

21

37

17

46

2

Illinois

23

15

13

41

37

44

Indiana

11

20

10

14

7

19

Iowa

42

46

45

13

28

29

Kansas

34

45

23

28

15

33

Kentucky

44

40

30

23

48

30

Louisiana

36

34

22

49

9

28

Maine

45

47

38

10

42

39

Maryland

22

7

39

8

17

37

Massachusetts

27

36

15

9

49

41

Michigan

26

49

11

32

40

20

Minnesota

38

41

36

34

35

15

Mississippi

29

33

16

46

2

26

Missouri

20

4

25

29

8

17

Montana

9

17

21

5

24

23

Nebraska

43

42

34

36

14

42

Nevada

5

1

7

47

38

11

New Hampshire

6

38

8

2

44

31

New Jersey

49

50

46

27

27

46

New Mexico

28

31

24

48

18

1

New York

50

30

50

39

47

43

North Carolina

37

22

43

35

5

40

North Dakota

31

35

42

18

36

4

Ohio

47

37

48

45

13

48

Oklahoma

17

8

28

15

3

21

Oregon

10

24

33

4

30

8

Pennsylvania

16

32

12

19

16

45

Rhode Island

48

27

40

30

50

49

South Carolina

30

12

29

12

45

32

South Dakota

2

1

1

42

31

9

Tennessee

15

11

9

44

33

38

Texas

7

18

4

21

6

34

Utah

18

5

31

24

23

5

Vermont

46

43

49

16

10

47

Virginia

19

8

18

6

25

36

Washington

13

19

2

50

39

24

West Virginia

35

28

41

31

34

22

Wisconsin

32

23

35

25

29

25

Wyoming

1

1

2

22

19

35

Note: Rankings do not average across to total. States without a given tax rank equally as number 1.

(Click here to read the full study. For audio of the news release conference call announcing the study, click here.)

For more information about the State Business Tax Climate Index, contact the press office at (202) 464-6200.

Follow Us

Tax Policy Blog

The official weblog of the Tax Foundation.

Go

Tax By State

For information on your state, select it from the drop-down menu.

 

Ask a Tax Expert

Contact information for Tax Foundation policy staff Ask