How Friendly Is Your State’s Tax System? The Tax Foundation’s 2014 State Business Tax Climate Index

This morning we released our 2014 State Business Tax Climate Index, which enables business leaders, government policymakers, and taxpayers to gauge how their states' tax systems compare. (Download PDF of the 2014 Index.)

While total taxes paid is a relevant measure, another is how the elements of a state tax system enhance or harm the competitiveness of a state's business environment. The Index looks at over 100 variables in individual income tax, corporate income tax, sales tax, unemployment insurance tax, and property tax to reduce these many complex considerations to an easy-to-use ranking.

The 10 best states in this year's 2014 Index are Wyoming, South Dakota, Nevada, Alaska, Florida, Washington, Montana, New Hampshire, Utah, and Indiana. Many of these states do not have one or more of the major taxes, and thus do not have the associated complexity and distortions. But this does not mean that a state cannot rank in the top ten while still levying all the major taxes. Indiana, which ousted Texas from the top ten this year (see page 5 of the report), and Utah have all the major tax types, but levy them with low rates on broad bases.

The 10 lowest ranked, or worst, states in the 2014 Index are New York, New Jersey, California, Minnesota, Rhode Island, Vermont, North Carolina, Wisconsin, Connecticut, and Maryland. The states in the bottom 10 suffer from the same afflictions: complex, non-neutral taxes with comparatively high rates.

While not reflected in this year’s edition, a great testament to the Index’s value is its use as a success metric for comprehensive reforms passed this year in North Carolina. While the state remains ranked 44th for this edition, it will move to as high as 17th as these reforms take effect in coming years. Positive changes enacted by Indiana, Nebraska, and New Mexico also take effect in future years (see page 53 of the report).

Minnesota, by contrast, enacted a package of tax changes that reduce the state’s competitiveness, including a retroactive hike in the individual income tax rate. Since last year, they have dropped from 45th to 47th place (see page 6). New York and New Jersey are in a virtual tie for last place, and any change next year could change their positions (see page 11). A problematic sales tax/gasoline tax reform in Virginia dropped that state three places (see page 12). Other major changes are noted in the blue boxes throughout the report.

We hope that this information helps you gauge how your tax system compares and provides a roadmap for improving the business tax climate. Each year, the Index report is downloaded over half a million times and is referenced in hundreds of major media articles and in several State of the State addresses. The rankings are used in other organization's rankings as the tax component, and recent academic evidence found correlation between Index component ranking and state wage and economic growth.

The 2014 Index represents the tax climate of each state as of July 1, 2013, the first day of the standard 2014 state fiscal year. Read the 56-page Index report by Scott Drenkard and Joseph Henchman and the results at https://taxfoundation.org/index (Download a PDF version here.)

State Overall Rank Corporate Tax Rank Individual Income Tax Rank Sales Tax Rank Unemployment Insurance Tax Rank Property Tax Rank
Alabama 21 19 22 37 15 10
Alaska 4 28 1 5 29 25
Arizona 22 26 18 49 1 6
Arkansas 35 39 26 42 11 19
California 48 31 50 41 16 14
Colorado 19 21 15 44 28 22
Connecticut 42 35 33 32 23 49
Delaware 13 50 28 2 2 13
Florida 5 13 1 18 6 16
Georgia 32 8 41 12 24 31
Hawaii 30 4 35 16 38 12
Idaho 18 18 23 23 47 3
Illinois 31 47 11 33 43 44
Indiana 10 24 10 11 13 5
Iowa 40 49 32 24 36 38
Kansas 20 37 17 31 12 29
Kentucky 27 27 29 10 48 17
Louisiana 33 17 25 50 4 24
Maine 29 45 21 9 33 40
Maryland 41 15 46 8 40 41
Massachusetts 25 34 13 17 49 47
Michigan 14 9 14 7 44 28
Minnesota 47 44 47 35 41 33
Mississippi 17 11 20 28 5 32
Missouri 16 7 27 26 9 7
Montana 7 16 19 3 21 8
Nebraska 34 36 30 29 8 39
Nevada 3 1 1 40 42 9
New Hampshire 8 48 9 1 46 42
New Jersey 49 41 48 46 32 50
New Mexico 38 40 34 45 17 1
New York 50 25 49 38 45 45
North Carolina 44 29 42 47 7 30
North Dakota 28 22 38 21 19 2
Ohio 39 23 44 30 10 20
Oklahoma 36 12 39 39 3 11
Oregon 12 32 31 4 34 15
Pennsylvania 24 46 16 19 39 43
Rhode Island 46 43 36 27 50 46
South Carolina 37 10 40 22 30 21
South Dakota 2 1 1 34 37 18
Tennessee 15 14 8 43 27 37
Texas 11 38 7 36 14 35
Utah 9 5 12 20 18 4
Vermont 45 42 45 13 22 48
Virginia 26 6 37 6 35 26
Washington 6 30 1 48 20 23
West Virginia 23 20 24 25 26 27
Wisconsin 43 33 43 15 25 36
Wyoming 1 1 1 14 31 34
Dist. of Columbia 44 35 34 41 26 44
Note: A rank of 1 is more favorable for business than a rank of 50. Rankings do not average to total. States without a tax rank equally as 1. D.C. score and rank do not affect other states. Report shows tax systems as of July 1, 2013 (the beginning of Fiscal Year 2014).
Source: Tax Foundation.

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