Our 2023 State Business Tax Climate Index, released in October, considers five main 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. categories: corporate taxes, individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. es, sales and 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, property and wealth taxA wealth tax is imposed on an individual’s net wealth, or the market value of their total owned assets minus liabilities. A wealth tax can be narrowly or widely defined, and depending on the definition of wealth, the base for a wealth tax can vary. es, and unemployment insurance taxes. Today, we take a closer look at states’ rankings on the corporate tax component, which accounts for 21.1 percent of each state’s overall rank.
The corporate tax component of our State Business Tax Climate Index measures each state’s principal tax on business activities. Most states levy a corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. on a company’s profits (receipts minus most business expenses, including compensation and the cost of goods sold), while some states levy gross receipts taxA gross receipts tax is a tax applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. es, which allow few or no deductions for a company’s expenses.
Unlike other studies that look solely at tax burdens, the Index measures how well or poorly each state structures its tax system. It is concerned with the how, not the how much, of state revenue, because there are better and worse ways to levy taxes. Our corporate tax component, for example, scores states not just on their corporate tax rates and brackets, but also on how they handle net operating losses, whether they levy gross receipts-style taxes (which are more economically harmful than corporate income taxes), whether businesses can fully expense purchases of machinery and equipment, and whether states index their brackets for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. , among other factors.
All corporate income taxes fall on capital investment, but the structure should not make matters worse, and policymakers should take care not to distort investment decisions through the use of targeted incentives for select firms or activities instead of a lower rate for all businesses. The Index rewards neutrality while penalizing states with alternative minimum taxes, heavy reliance on incentives, and provisions leading to double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. .
Click here to see an interactive version of states’ corporate tax rankings, and then click on your state for more information about how its tax system compares both regionally and nationally.
| State | 2020 Rank | 2021 Rank | 2022 Rank | 2023 Rank | Change from 2022 to 2023 |
|---|---|---|---|---|---|
| Alabama | 23 | 23 | 17 | 18 | -1 |
| Alaska | 25 | 25 | 27 | 28 | -1 |
| Arizona | 21 | 22 | 23 | 23 | 0 |
| Arkansas | 33 | 33 | 29 | 29 | 0 |
| California | 27 | 27 | 46 | 46 | 0 |
| Colorado | 7 | 9 | 6 | 7 | -1 |
| Connecticut | 26 | 26 | 26 | 27 | -1 |
| Delaware | 50 | 50 | 50 | 50 | 0 |
| Florida | 9 | 6 | 7 | 10 | -3 |
| Georgia | 6 | 7 | 8 | 8 | 0 |
| Hawaii | 17 | 19 | 19 | 19 | 0 |
| Idaho | 28 | 28 | 28 | 26 | 2 |
| Illinois | 35 | 35 | 38 | 38 | 0 |
| Indiana | 11 | 12 | 11 | 11 | 0 |
| Iowa | 48 | 46 | 33 | 34 | -1 |
| Kansas | 34 | 30 | 21 | 21 | 0 |
| Kentucky | 13 | 15 | 15 | 15 | 0 |
| Louisiana | 36 | 34 | 34 | 32 | 2 |
| Maine | 37 | 36 | 35 | 35 | 0 |
| Maryland | 31 | 32 | 32 | 33 | -1 |
| Massachusetts | 38 | 37 | 36 | 36 | 0 |
| Michigan | 18 | 20 | 20 | 20 | 0 |
| Minnesota | 45 | 43 | 43 | 43 | 0 |
| Mississippi | 10 | 13 | 13 | 13 | 0 |
| Missouri | 3 | 3 | 3 | 3 | 0 |
| Montana | 20 | 21 | 22 | 22 | 0 |
| Nebraska | 30 | 31 | 31 | 30 | 1 |
| Nevada | 24 | 24 | 25 | 25 | 0 |
| New Hampshire | 42 | 44 | 44 | 44 | 0 |
| New Jersey | 49 | 48 | 48 | 48 | 0 |
| New Mexico | 22 | 11 | 12 | 12 | 0 |
| New York | 14 | 16 | 24 | 24 | 0 |
| North Carolina | 4 | 4 | 4 | 5 | -1 |
| North Dakota | 19 | 8 | 9 | 9 | 0 |
| Ohio | 41 | 40 | 39 | 39 | 0 |
| Oklahoma | 8 | 10 | 10 | 4 | 6 |
| Oregon | 32 | 49 | 49 | 49 | 0 |
| Pennsylvania | 44 | 42 | 42 | 42 | 0 |
| Rhode Island | 40 | 39 | 40 | 40 | 0 |
| South Carolina | 5 | 5 | 5 | 6 | -1 |
| South Dakota | 1 | 1 | 1 | 1 | 0 |
| Tennessee | 47 | 45 | 45 | 45 | 0 |
| Texas | 46 | 47 | 47 | 47 | 0 |
| Utah | 12 | 14 | 14 | 14 | 0 |
| Vermont | 43 | 41 | 41 | 41 | 0 |
| Virginia | 15 | 17 | 16 | 17 | -1 |
| Washington | 39 | 38 | 37 | 37 | 0 |
| West Virginia | 16 | 18 | 18 | 16 | 2 |
| Wisconsin | 29 | 29 | 30 | 31 | -1 |
| Wyoming | 1 | 1 | 1 | 1 | 0 |
| District of Columbia | 27 | 27 | 28 | 29 | -1 |
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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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