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.)