Ranking Sales Taxes on the 2022 State Business Tax Climate Index

Today we continue our map series on the 2022 State Business Tax Climate Index with a map showing states’ rankings on the Index’s 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. component. The 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 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. rates increase, consumers may cut back on purchases or move their shopping to lower-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. jurisdictions. The sales tax component accounts for 23.7 percent of each state’s overall Index score.

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 people change their purchasing behavior because of tax differences. In addition, sales tax exemptions narrow the tax base, driving up the sales tax rate on those goods and services that remain subject to the tax or forcing greater reliance on less economically efficient taxes.

It is important to note that a well-structured sales tax applies only to the final consumer at the point of sale. It 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.

This section of the Index also looks at how states apply their sales taxes to remote sellers. While most states have adopted appropriate safe harbors for small sellers and have a single point of administration for all state and local sales taxes, a few are penalized because they diverge from these practices, imposing substantial compliance costs on out-of-state retailers.

As shown on the map, the highest-scoring states on the sales tax component of the 2022 Index are those without a state sales tax: New Hampshire, Delaware, Montana, Oregon, and Alaska. (They do not receive perfect scores because each state does impose excise taxes with varying degrees of competitiveness, and Alaska permits local sales taxes.) The states with the next best scores—Wyoming, Wisconsin, Maine, Idaho, Michigan, Virginia, and Massachusetts—have well-structured sales taxes and modest excise tax rates.

States that rank poorly on this component have high sales tax rates, high excise tax rates, complicated sales tax administration, and apply the sales tax to a variety of business inputs while exempting many final consumer purchases. The lowest-scoring states are Alabama, Washington, Louisiana, California, and Tennessee.

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 following table.

How Does Your State Rank on Sales Taxes?

Sales Tax Component of the State Business Tax Climate Index (2019–2022)
State	2019 Rank	2020 Rank	2021 Rank	2022 Rank	Change from 2021 to 2022
Alabama	50	50	50	50	0
Alaska	5	5	5	5	0
Arizona	40	40	40	40	0
Arkansas	45	46	46	45	1
California	46	45	45	47	-2
Colorado	37	37	36	38	-2
Connecticut	29	26	25	23	2
Delaware	2	2	2	2	0
Florida	22	23	23	21	2
Georgia	35	33	32	33	-1
Hawaii	32	29	28	28	0
Idaho	12	11	9	9	0
Illinois	34	34	39	39	0
Indiana	13	20	20	19	1
Iowa	18	14	14	15	-1
Kansas	27	38	37	27	10
Kentucky	19	13	13	13	0
Louisiana	48	48	48	48	0
Maine	8	8	8	8	0
Maryland	17	19	18	26	-8
Massachusetts	10	12	12	12	0
Michigan	14	10	10	10	0
Minnesota	26	28	27	29	-2
Mississippi	36	32	31	32	-1
Missouri	25	24	24	25	-1
Montana	3	3	3	3	0
Nebraska	11	15	15	14	1
Nevada	44	44	44	44	0
New Hampshire	1	1	1	1	0
New Jersey	42	42	42	43	-1
New Mexico	41	41	41	41	0
New York	43	43	43	42	1
North Carolina	24	21	21	20	1
North Dakota	30	27	29	30	-1
Ohio	28	31	34	35	-1
Oklahoma	39	39	38	37	1
Oregon	4	4	4	4	0
Pennsylvania	21	17	17	17	0
Rhode Island	23	25	26	24	2
South Carolina	33	30	30	31	-1
South Dakota	31	35	33	34	-1
Tennessee	47	47	47	46	1
Texas	38	36	35	36	-1
Utah	15	22	22	22	0
Vermont	20	16	16	16	0
Virginia	9	9	11	11	0
Washington	49	49	49	49	0
West Virginia	16	18	19	18	1
Wisconsin	7	7	7	7	0
Wyoming	6	6	6	6	0
District of Columbia	31	36	34	37	-3
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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