Ranking Sales Taxes on the 2023 State Business Tax Climate Index

Today we continue our map series on the 2023 State Business Tax Climate Index with a map showing states’ rankings on the Index’s sales and excise taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. component. The sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. rate and structure can make a state more or less attractive to businesses for two key reasons: (1) some states apply the sales tax to business inputs, which drives up the costs of production, and (2) as sales tax rates increase, consumers may cut back on purchases or move their shopping to lower-tax jurisdictions. The sales tax component accounts for 23.5 percent of each state’s overall Index score.

An ideal sales tax applies to a broad base of final consumer goods and services, with few exemptions, and is levied at a low rate. Broad-based, low-rate tax structures minimize tax-induced economic distortions that can occur when people change their purchasing behavior because of tax differences. In addition, sales tax exemptions narrow the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. , driving up the sales tax rate on those goods and services that remain subject to the tax or forcing greater reliance on less economically efficient taxes.

It is important to note that a well-structured sales tax applies only to the final consumer at the point of sale. It does not apply to the sale of machinery, raw materials, and other business inputs, as those taxes increase the costs of production and ultimately get passed along to consumers in the form of higher prices. States that avoid taxing business inputs perform better on the Index.

This section of the Index also looks at how states apply their sales taxes to remote sellers. While most states have adopted appropriate safe harbors for small sellers and have a single point of administration for all state and local sales taxes, a few are penalized because they diverge from these practices, imposing substantial compliance costs on out-of-state retailers.

As shown on the map, the highest-scoring states on the sales tax component of the 2023 Index are those without a state sales tax: New Hampshire, Delaware, Montana, Oregon, and Alaska. (They do not receive perfect scores because each state does impose excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. es with varying degrees of competitiveness, and Alaska permits local sales taxes.) The states with the next best scores—Wyoming, Wisconsin, Maine, Nebraska, Idaho, Michigan, and Virginia—have well-structured sales taxes and modest excise tax rates.

States that rank poorly on this component have high sales tax rates, high excise tax rates, and complicated sales tax administration. They also apply the sales tax to a variety of business inputs while exempting many final consumer purchases. The lowest-scoring states are Alabama, Washington, Louisiana, California, and Tennessee.

To learn more about your state’s score on the sales tax component, click here.

To see whether your state’s sales tax structure has become more or less competitive in recent years, check out the following table.

How Does Your State Rank on Sales Taxes?

Sales and Excise Tax Component of the State Business Tax Climate Index (2020–2023)
State	2020 Rank	2021 Rank	2022 Rank	2023 Rank	Change from 2022 to 2023
Alabama	50	50	50	50	0
Alaska	5	5	5	5	0
Arizona	40	40	40	41	-1
Arkansas	45	45	45	45	0
California	47	47	47	47	0
Colorado	37	36	38	40	-2
Connecticut	26	25	23	23	0
Delaware	2	2	2	2	0
Florida	23	23	21	21	0
Georgia	30	29	29	31	-2
Hawaii	29	28	28	27	1
Idaho	12	10	10	10	0
Illinois	34	39	39	38	1
Indiana	20	20	19	19	0
Iowa	15	15	15	15	0
Kansas	38	37	26	25	1
Kentucky	14	14	14	14	0
Louisiana	48	48	48	48	0
Maine	8	8	8	8	0
Maryland	19	18	27	30	-3
Massachusetts	13	13	13	13	0
Michigan	11	11	11	11	0
Minnesota	28	27	31	29	2
Mississippi	33	32	33	33	0
Missouri	24	24	25	26	-1
Montana	3	3	3	3	0
Nebraska	9	9	9	9	0
Nevada	44	44	44	44	0
New Hampshire	1	1	1	1	0
New Jersey	42	42	43	42	1
New Mexico	41	41	41	35	6
New York	43	43	42	43	-1
North Carolina	21	21	20	20	0
North Dakota	27	30	30	28	2
Ohio	32	34	35	36	-1
Oklahoma	39	38	37	39	-2
Oregon	4	4	4	4	0
Pennsylvania	17	17	17	16	1
Rhode Island	25	26	24	24	0
South Carolina	31	31	32	32	0
South Dakota	35	33	34	34	0
Tennessee	46	46	46	46	0
Texas	36	35	36	37	-1
Utah	22	22	22	22	0
Vermont	16	16	16	17	-1
Virginia	10	12	12	12	0
Washington	49	49	49	49	0
West Virginia	18	19	18	18	0
Wisconsin	7	7	7	7	0
Wyoming	6	6	6	6	0
District of Columbia	36	34	37	39	-2
Note: A rank of 1 is best, 50 is worst. All scores are for fiscal years. DC’s score and rank do not affect other states. Source: Tax Foundation.

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