Ranking Sales Taxes on the 2019 State Business Tax Climate Index

Today we continue our map series on the 2019 State Business Tax Climate Index with a map showing states’ rankings on the Index’s sales 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. component accounts for 25.3 percent of each state’s overall Index score.

A state’s sales tax 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.

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 consumers alter their purchasing behavior due to tax differentials. 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, making the rate higher than otherwise necessary.

Importantly, a well-structured sales tax applies to the end-user at the point of sale but 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.

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As shown on the map above, the highest-scoring states are those without a state sales tax: New Hampshire, Delaware, Montana, Oregon, and Alaska. The states with the next best scores–Wyoming, Maine, Wisconsin, Nebraska, Virginia, Michigan, and Indiana–have well-structured sales taxes and modest 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. rates.

The lowest-scoring states on this component are states that have high sales tax rates, high excise tax rates, or apply the sales tax to a variety of business inputs. The states with the lowest scores on this component are Louisiana, Washington, Alabama, Arizona, Tennessee, and New Jersey.

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 table below.

Sales Tax Component of the State Business Tax Climate Index (2016–2019)

	2016 Rank	2017 Rank	2018 Rank	2019 Rank	Rank Change from 2018 to 2019
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.
Alabama	48	48	48	48	0
Alaska	5	5	5	5	0
Arizona	46	47	47	47	0
Arkansas	47	44	44	44	0
California	42	40	41	43	-2
Colorado	39	39	39	38	+1
Connecticut	30	29	28	30	-2
Delaware	1	1	1	2	-1
Florida	22	22	22	22	0
Georgia	35	34	29	29	0
Hawaii	24	26	26	24	+2
Idaho	28	27	27	26	+1
Illinois	34	35	35	36	-1
Indiana	17	12	10	12	-2
Iowa	19	20	19	19	0
Kansas	33	28	31	31	0
Kentucky	14	13	14	14	0
Louisiana	49	50	50	50	0
Maine	8	8	8	7	+1
Maryland	16	17	18	18	0
Massachusetts	18	18	13	13	0
Michigan	10	11	12	11	+1
Minnesota	26	25	25	27	-2
Mississippi	38	38	38	35	+3
Missouri	25	24	24	25	-1
Montana	3	3	3	3	0
Nebraska	9	9	9	9	0
Nevada	40	41	42	40	+2
New Hampshire	2	2	2	1	+1
New Jersey	44	45	46	45	+1
New Mexico	41	42	40	41	-1
New York	43	43	43	42	+1
North Carolina	20	19	20	20	0
North Dakota	32	32	32	32	0
Ohio	29	31	30	28	+2
Oklahoma	36	36	36	39	-3
Oregon	4	4	4	4	0
Pennsylvania	21	21	21	21	0
Rhode Island	23	23	23	23	0
South Carolina	31	30	33	34	-1
South Dakota	27	33	34	33	+1
Tennessee	45	46	45	46	-1
Texas	37	37	37	37	0
Utah	13	16	17	16	+1
Vermont	15	15	16	15	+1
Virginia	11	10	11	10	+1
Washington	50	49	49	49	0
West Virginia	12	14	15	17	-2
Wisconsin	7	7	7	8	-1
Wyoming	6	6	6	6	0
District of Columbia	27	27	27	25	+2

To learn more about how we determined these rankings, read our full methodology here.

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