New Report: 2015 State Business Tax Climate Index
October 28, 2014
I wanted to make sure you saw our new State Business Tax Climate Index, released today.
The Index enables business leaders, government policymakers, and taxpayers to gauge how their states’ tax systems compare. While there are many ways to show how much is collected in taxes by state governments, the Index uses over 100 variables in the areas of individual income tax, corporate income tax, sales tax, unemployment insurance tax, and property tax to show how well states structure their tax systems, and provides a road-map to improving these structures. The 2015 Index reflects law as of July 1, 2014.
The top states in the 2015 Index are Wyoming, South Dakota, Nevada, Alaska, Florida, Montana, New Hampshire, Indiana, Utah, and Texas. The absence of a major tax is a common factor among many of the top ten states. Property taxes and unemployment insurance taxes are levied in every state, but there are several states that do without one or more of the major taxes: the corporate tax, the individual income tax, or the sales tax. Wyoming, Nevada, and South Dakota have no corporate or individual income tax; Alaska has no individual income or state-level sales tax; Florida has no individual income tax; and New Hampshire and Montana have no sales tax. But this does not mean that a state cannot rank in the top ten while still levying all the major taxes. Indiana and Utah, for example, have all the major tax types, but levy them with low rates on broad bases.
The bottom states are New Jersey, New York, California, Minnesota, Vermont, Rhode Island, Ohio, Wisconsin, Connecticut, and Iowa. The states in the bottom ten suffer from the same afflictions: complex, non-neutral taxes with comparatively high rates. New Jersey, for example, suffers from some of the highest property tax burdens in the country, is one of just two states to levy both an inheritance and an estate tax, and maintains some of the worst structured individual income taxes in the country.
Notable changes in this year's report include:
- North Carolina. In this year's edition, North Carolina has improved dramatically from 44th place last year to 16th place this year, a 28-rank jump. The state improved its score in the corporate, individual, and sales tax components of the Index, and as the 2013 reform package continues to phase in, the state is projected to continue climbing the rankings. North Carolina’s largest improvement was in the individual income tax component section, where legislation restructured the previously multi-bracketed system with a top rate of 7.75 percent to a single-bracket system with a rate of 5.8 percent and a generous standard deduction of $7,500. The corporate income tax rate in North Carolina is also phasing down, from 6.9 percent last year to 6 percent this year. The rate is subject to a trigger mechanism that will further reduce the rate in future years when state general fund revenues are healthy, to as low as 3 percent by 2017. Finally, the state improved its sales tax structure this year by disallowing localities the ability to set their own tax bases, improving simplicity for sales tax filing.
- Kansas. Despite income tax cuts that are phasing in, Kansas dropped three rankings overall, from 19th to 22nd, as North Carolina jumped several spaces, and West Virginia’s score continued to improve as property tax and corporate tax improvements phased in. The state’s decision to carve out pass-through income from taxation, while increasing spending, has caused budget uncertainty. Although these policies are not entirely captured by the Index, a better path for Kansas tax reform would be the one set out by states like North Carolina, Indiana, and Nebraska.
- Maine fell five rankings overall, from 28th to 33rd, primarily due to a sales tax rate increase but also partly due to improvements in the relative rankings of North Carolina and Nebraska.
- Nebraska improved five ranks overall, from 34th place to 29th, due to improvements in its corporate and individual income tax systems, including reform of corporate net operating loss carryforwards, a repeal of the individual alternative minimum tax, and indexation of the brackets of the individual income tax code.
- New York's corporate income tax ranking improved from 24th to 20th as a result of corporate tax reform passed this year that is starting to phase in. Once fully phased in, the package will lower the corporate rate from 7.1 to 6.5 percent, eliminate the capital stock tax and corporate alternative minimum tax, extend net operating loss carrybacks from 2 to 3 years, and remove the carryback cap. Once fully phased in, the corporate tax component of the Index is expected to improve to 4th place.
- North Dakota improved from 27th to 25th overall due to a cut in the top individual income tax rate from 3.99 percent to 3.22 percent.
- Wisconsin. Though Wisconsin’s overall rank did not change for this edition of the Index, the state repealed its inventory tax on rental property, improving its property tax component score from 36th to 31st, and conformed mineral depletion to federal schedules, improving its corporate tax component score from 34th to 33rd.
Additionally, the Index report discusses positive changes scheduled to take effect but not yet in law on July 1, 2014 in Arizona, Illinois, Indiana, Kansas, Missouri,New Mexico, New York, North Carolina, Pennsylvania, Rhode Island,West Virginia, and the District of Columbia.