2017 State Business Tax Climate Index

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Executive Summary

The Tax Foundation’s State Business 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. Climate 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 is designed to show how well states structure their tax systems, and provides a roadmap for improvement. The 10 best states in this year’s Index are:

1. Wyoming
2. South Dakota
3. Alaska
4. Florida
5. Nevada
6. Montana
7. New Hampshire
8. Indiana
9. Utah
10. Oregon

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 income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. , the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. , or 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. . Wyoming, Nevada, and South Dakota have no corporate or individual income tax (though Nevada imposes gross receipts taxes); Alaska has no individual income or state-level sales tax; Florida has no individual income tax; and New Hampshire, Montana, and Oregon have no sales tax. This does not mean, however, that a state cannot rank in the top ten while still levying all the major taxes. Indiana and Utah, for example, levy all of the major tax types, but do so with low rates on broad bases. The 10 lowest ranked, or worst, states in this year’s Index are:

41. Louisiana
42. Maryland
43. Connecticut
44. Rhode Island
45. Ohio
46. Minnesota
47. Vermont
48. California
49. New York
50. New Jersey

The states in the bottom 10 tend to have a number of shortcomings in common: complex, non-neutral taxes with comparatively high rates. New Jersey, for example, is hampered by some of the highest property tax burdens in the country, is one of just two states to levy both an inheritance taxAn inheritance tax is levied upon an individual’s estate at death or upon the assets transferred from the decedent’s estate to their heirs. Unlike estate taxes, inheritance tax exemptions apply to the size of the gift rather than the size of the estate. and an estate tax, and maintains some of the worst-structured individual income taxes in the country.

Table 1. 2017 State Business Tax Climate Index Index Ranks and Component Tax Ranks

	Overall Rank	Corporate Tax Rank	Individual Income Tax Rank	Sales Tax Rank	Unemployment Insurance Tax Rank	Property Tax Rank
Note: A rank of 1 is best, 50 is worst. Rankings do not average to the total. States without a tax rank equally as 1. D.C.’s score and rank do not affect other states. The report shows tax systems as of July 1, 2016 (the beginning of Fiscal Year 2017). Source: Tax Foundation.
Source: Tax Foundation.
Alabama	32	14	22	48	14	16
Alaska	3	27	1	5	29	22
Arizona	21	19	19	47	13	6
Arkansas	38	40	29	44	30	24
California	48	33	50	40	16	15
Colorado	16	18	16	39	42	14
Connecticut	43	32	37	27	21	49
Delaware	19	50	34	1	3	20
Florida	4	19	1	28	2	10
Georgia	36	10	42	33	35	21
Hawaii	26	11	31	23	24	17
Idaho	20	24	23	26	46	2
Illinois	23	26	10	35	38	46
Indiana	8	23	11	10	10	4
Iowa	40	47	33	21	34	40
Kansas	22	39	18	30	11	19
Kentucky	34	28	30	13	48	36
Louisiana	41	36	27	50	9	30
Maine	30	41	25	8	44	41
Maryland	42	21	46	14	26	42
Massachusetts	27	37	13	18	49	45
Michigan	12	8	14	9	47	25
Minnesota	46	43	45	25	28	33
Mississippi	28	12	20	38	5	35
Missouri	15	5	28	24	7	7
Montana	6	13	21	3	19	9
Nebraska	25	29	24	12	8	39
Nevada	5	34	1	41	43	8
New Hampshire	7	46	9	2	41	43
New Jersey	50	42	48	45	25	50
New Mexico	35	25	35	42	17	1
New York	49	7	49	43	32	47
North Carolina	11	4	15	19	6	31
North Dakota	29	16	36	34	15	3
Ohio	45	45	47	29	4	11
Oklahoma	31	9	38	36	1	12
Oregon	10	35	32	4	33	18
Pennsylvania	24	44	17	20	45	32
Rhode Island	44	31	39	22	50	44
South Carolina	37	15	41	31	37	26
South Dakota	2	1	1	32	40	23
Tennessee	13	22	8	46	23	29
Texas	14	49	6	37	12	37
Utah	9	3	12	17	22	5
Vermont	47	38	44	16	20	48
Virginia	33	6	40	11	39	28
Washington	17	48	6	49	18	27
West Virginia	18	17	26	15	27	13
Wisconsin	39	30	43	7	36	34
Wyoming	1	1	1	6	31	38
District of Columbia	47	31	43	33	27	47

Notable Ranking Changes in this Year’s Index

Arizona

Arizona is in the process of lowering its corporate income tax rate. Scheduled annual rate reductions began in 2015 and will continue through 2018, with the rate declining from 6.0 to 5.5 percent in 2016. The first reduction helped the state improve three places on the corporate income tax component, and this year’s reduction moved the state a further three places on the corporate component, from 22nd to 19th, with the state’s overall rank improving from 22nd to 21st. The cuts have been aided by limitations on credits and other tax preferences, which have helped pay down rate reductions.

Arkansas

Arkansas lowered its top marginal rate from 7 percent to 6.9 percent, but simultaneously adopted new rate schedules, making it the only state in which taxpayers at different income levels pay under distinct rate schedules. This income recapture provision offsets the modest top marginal rate reduction, with the state’s rank declining from 29th to 30th on the individual income tax component.

Hawaii

The expiration of temporary tax increases in Hawaii resulted in the elimination of the top three individual income tax brackets and the lowering of the top marginal rate from 11 to 8.25 percent. Although the income tax still features an unusually numerous nine brackets, these changes improved the state from 37th to 31st on the individual income tax component, and from 30th to 27th overall.

Indiana

Last year, Indiana completed a four-year phasedown of its corporate income tax rate from 8.5 to 6.5 percent, the culmination of legislation adopted in 2011. Subsequent legislation enacted in 2014 established a further schedule of rate reductions through fiscal year 2022, when the corporate income tax will drop to 4.9 percent. For 2017, the rate declined from 6.5 to 6.25 percent, which, along with the elimination of the state’s throwback rule, bumped the state’s corporate component rank from 24th to 23rd. The state ranks 8th overall, an improvement from its rank of 10th in 2016.

Louisiana

Buffeted by structural shortfalls and declining revenue, Louisiana policymakers added a penny to the state sales tax, increasing the state rate from 4 to 5 percent while introducing greater complexity to the sales tax base. With the combined state and local rate now approaching 10 percent, Louisiana slipped from 48th to 50th on the sales tax component of the Index, and declined from 36th to 41st overall.

Maine

Maine improved slightly (from 26th to 25th) on the individual component of the Index as a result of changes made to the state’s individual income tax, adding a third bracket (which hurts the state’s score) while lowering rates (which improved the state’s score). Rates were cut from 6.5 and 7.95 percent to three rates of 5.8, 6.75, and 7.15 percent.

New York

Two years ago, New York policymakers enacted a substantial corporate tax reform package that continues to phase in, with this year’s changes improving the state’s rank on the corporate income tax component from 11th to 7th. This year, the state lowered its corporate income tax rate from 7.1 to 6.5 percent and reduced the capital stock tax rate from 0.15 to 0.125 percent. The capital stock tax is on a path to repeal, which can be expected to yield improvements on the property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. component in future editions of the Index.

North Carolina

After the most dramatic improvement in the Index’s history—from 41st to 11th in one year—North Carolina has continued to improve its tax structure, and now imposes the lowest-rate corporate income tax in the country at 4 percent, down from 5 percent the previous year. This rate cut improves the state from 6th to 4th on the corporate income tax component, the second-best ranking (after Utah) for any state that imposes a major corporate tax. (Six states forego corporate income taxes, but four of them impose economically distortive gross receipts taxes in their stead.) An individual income tax reduction, from 5.75 to 5.499 percent, is scheduled for 2017. At 11th overall, North Carolina trails only Indiana and Utah among states which do not forego any of the major tax types.

Oklahoma

Oklahoma improved from 40th to 38th on the individual component of the Index as the individual income tax incorporated the first of two scheduled rate reductions. The state is in the process of lowering the income tax rate, subject to revenue triggers, in two stages, from 5.25 to 4.85 percent. The state met its first-year benchmark, resulting in a rate cut to 5.0 percent.

Pennsylvania

Pennsylvania’s capital stock tax, originally slated for elimination in 2014, was fully phased out in 2016, resulting in an improvement of six ranks on the property tax component, from 38th to 32nd. In tandem with improvements to the state’s previously worst-in-the-nation unemployment insurance tax structure, the elimination of the capital stock tax drove an improvement from 28th to 24th overall.

South Dakota

South Dakota increased its sales tax from 4.0 to 4.5 percent. The state’s rank on the sales tax component of the Index fell from 27th to 32nd, though the state still ranks 2nd overall by foregoing both individual and corporate income taxes. While South Dakota’s sales tax is still imposed at a low rate, its base includes a wide range of business inputs.

Texas

The rate of the Texas gross receipts taxA gross receipts tax, also known as a turnover tax, is applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. , called the Margin Tax, fell from 0.95 to 0.75 percent in 2016. This improvement affected the state’s raw score on the corporate tax component, but did not result in an improvement in component rank. Texas fell slightly overall due to a relative decline on property tax rank.

District of Columbia

In 2014, the District of Columbia began phasing in a tax reform package which lowered individual income taxes for middle-income brackets, expanded the sales 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. , and raised the estate tax exemption. While last year’s corporate income tax reductions improved the District’s standing on the Index, the new income tax bracketsA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. created in 2016 caused the District of Columbia to slip from 34th to 43rd on the individual income tax component, as the changes included the creation of an additional tax bracket and a new top rate kick-in of $1 million, up from $350,000. When changes to the corporate income tax are fully phased in, the District of Columbia is projected to improve from 31st to 25th on the corporate tax component of the Index.

Recent and Proposed Changes Not Reflected in the 2017 Index

Indiana

While Indiana phased in a further reduction of its corporate income tax this year, the final scheduled reduction in the state’s individual income tax rate, to 3.23 percent, is slated for 2017. The corporate income tax rate is also scheduled to phase down to 4.9 percent.

Mississippi

In 2016, Mississippi adopted a gradual phase-out of its capital stock tax, which will begin in 2018 and fully repeal the tax by 2028. The state will also begin phasing in a reduction in its corporate and individual income tax rates starting in 2018. These changes will be reflected in subsequent editions of the Index.

Missouri

In 2015, Missouri policymakers passed an income tax reduction that lowers the top rate by 0.1 percent each year starting in 2017, dependent on a revenue trigger. These changes will be reflected in the 2018 Index and subsequent editions.

New Mexico

New Mexico continues to phase in corporate income tax rate reductions, with the rate scheduled to drop to 5.9 percent by 2018. This year’s reduction, from 6.9 to 6.6 percent, did not improve the state’s rank, but as the rate continues to decline, these reforms will enhance the state’s standing in comparison to its neighbors and further improve its corporate tax component score.

Tennessee

In 2016, Tennessee began phasing out its Hall income tax, which is imposed on interest and dividend income. The Index includes this tax at a calculated rate to reflect its unusually narrow base. The first-year rate reduction was too small to change any component rankings, but Tennessee’s rank will improve once the tax is fully phased out in 2022.

Table 2. State Business Tax Climate Index Index (2014–2017)

State	2014 Rank	2014 Score	2015 Rank	2015 Score	2016 Rank	2016 Score	2017 Rank	2017 Score	Change from 2016 to 2017
									Rank	Score
Note: A rank of 1 is best, 50 is worst. All scores are for fiscal years. D.C.’s score and rank do not affect other states.
Source: Tax Foundation.
Alabama	35	4.88	36	4.79	35	4.76	32	4.91	+3	+0.15
Alaska	4	7.27	4	7.27	3	7.38	3	7.29	0	-0.09
Arizona	22	5.18	24	5.13	22	5.19	21	5.21	+1	+0.02
Arkansas	38	4.72	40	4.61	41	4.50	38	4.60	+3	+0.10
California	48	3.78	48	3.76	48	3.76	48	3.76	0	0.00
Colorado	18	5.31	18	5.34	16	5.40	16	5.38	0	-0.02
Connecticut	43	4.48	43	4.45	43	4.35	43	4.34	0	-0.01
Delaware	15	5.49	15	5.45	14	5.52	19	5.32	-5	-0.20
Florida	5	6.85	5	6.84	4	6.89	4	6.86	0	-0.03
Georgia	37	4.72	38	4.70	39	4.61	36	4.68	+3	+0.07
Hawaii	32	4.93	32	4.93	30	4.93	26	5.13	+4	+0.20
Idaho	19	5.29	20	5.25	20	5.22	20	5.22	0	0.00
Illinois	28	4.98	31	4.94	23	5.18	23	5.21	0	+0.03
Indiana	10	5.82	10	5.80	10	5.81	8	5.96	+2	+0.15
Iowa	40	4.58	41	4.56	40	4.53	40	4.51	0	-0.02
Kansas	20	5.23	21	5.20	21	5.22	22	5.21	-1	-0.01
Kentucky	27	5.00	33	4.92	33	4.91	34	4.88	-1	-0.03
Louisiana	33	4.91	35	4.87	36	4.72	41	4.39	-5	-0.33
Maine	24	5.08	29	4.97	31	4.92	30	4.96	+1	+0.04
Maryland	42	4.48	42	4.48	42	4.40	42	4.36	0	-0.04
Massachusetts	23	5.17	25	5.12	25	5.15	27	5.13	-2	-0.02
Michigan	11	5.69	12	5.59	12	5.61	12	5.64	0	+0.03
Minnesota	47	4.18	47	4.16	46	4.19	46	4.19	0	0.00
Mississippi	21	5.22	22	5.18	26	5.13	28	5.13	-2	0.00
Missouri	13	5.52	16	5.44	17	5.39	15	5.45	+2	+0.06
Montana	6	6.36	6	6.33	6	6.31	6	6.27	0	-0.04
Nebraska	26	5.01	23	5.16	24	5.15	25	5.14	-1	-0.01
Nevada	3	7.45	3	7.43	5	6.45	5	6.46	0	+0.01
New Hampshire	7	6.13	7	6.09	7	6.14	7	6.11	0	-0.03
New Jersey	49	3.50	50	3.49	50	3.42	50	3.41	0	-0.01
New Mexico	34	4.90	34	4.87	34	4.88	35	4.85	-1	-0.03
New York	50	3.40	49	3.56	49	3.59	49	3.61	0	+0.02
North Carolina	41	4.52	11	5.60	11	5.67	11	5.73	0	+0.06
North Dakota	30	4.96	26	4.99	27	4.99	29	4.98	-2	-0.01
Ohio	44	4.24	44	4.25	45	4.23	45	4.27	0	+0.04
Oklahoma	31	4.93	28	4.97	32	4.92	31	4.95	+1	+0.03
Oregon	9	5.88	9	5.86	9	5.91	10	5.78	-1	-0.13
Pennsylvania	29	4.98	30	4.94	28	4.95	24	5.18	+4	+0.23
Rhode Island	46	4.22	45	4.20	44	4.33	44	4.30	0	-0.03
South Carolina	36	4.75	37	4.72	37	4.69	37	4.66	0	-0.03
South Dakota	2	7.56	2	7.55	2	7.47	2	7.49	0	+0.02
Tennessee	14	5.51	14	5.46	15	5.44	13	5.58	+2	+0.14
Texas	12	5.52	13	5.47	13	5.55	14	5.57	-1	+0.02
Utah	8	6.05	8	5.98	8	5.98	9	5.96	-1	-0.02
Vermont	45	4.22	46	4.19	47	4.17	47	4.13	0	-0.04
Virginia	25	5.01	27	4.99	29	4.94	33	4.90	-4	-0.04
Washington	16	5.41	17	5.37	18	5.38	17	5.38	+1	0.00
West Virginia	17	5.31	19	5.31	19	5.36	18	5.32	+1	-0.04
Wisconsin	39	4.63	39	4.67	38	4.63	39	4.57	-1	-0.06
Wyoming	1	7.78	1	7.79	1	7.76	1	7.76	0	0.00
District of Columbia	44	4.47	44	4.43	40	4.54	47	4.19	-7	-0.35

Introduction

Taxation is inevitable, but the specifics of a state’s tax structure matter greatly. The measure of total taxes paid is relevant, but other elements of a state tax system can also enhance or harm the competitiveness of a state’s business environment. The State Business Tax Climate Index distills many complex considerations to an easy-to-understand ranking. The modern market is characterized by mobile capital and labor, with all types of businesses, small and large, tending to locate where they have the greatest competitive advantage. The evidence shows that states with the best tax systems will be the most competitive at attracting new businesses and most effective at generating economic and employment growth. It is true that taxes are but one factor in business decision making. Other concerns also matter—such as access to raw materials or infrastructure or a skilled labor pool—but a simple, sensible tax system can positively impact business operations with regard to these resources. Furthermore, unlike changes to a state’s health care, transportation, or education systems, which can take decades to implement, changes to the tax code can quickly improve a state’s business climate. It is important to remember that even in our global economy, states’ stiffest competition often comes from other states. The Department of Labor reports that most mass job relocations are from one U.S. state to another rather than to a foreign location.^[1]Certainly, job creation is rapid overseas, as previously underdeveloped nations enter the world economy without facing the third highest corporate tax rate in the world, as U.S. businesses do.^[2]State lawmakers are right to be concerned about how their states rank in the global competition for jobs and capital, but they need to be more concerned with companies moving from Detroit, Michigan, to Dayton, Ohio, than from Detroit to New Delhi. This means that state lawmakers must be aware of how their states’ business climates match up against their immediate neighbors and to other regional competitor states. Anecdotes about the impact of state tax systems on business investment are plentiful. In Illinois early last decade, hundreds of millions of dollars of capital investments were delayed when then-Governor Rod Blagojevich proposed a hefty gross receipts tax.^[3] Only when the legislature resoundingly defeated the bill did the investment resume. In 2005, California-based Intel decided to build a multibillion dollar chip-making facility in Arizona due to its favorable corporate income tax system.^[4]In 2010, Northrup Grumman chose to move its headquarters to Virginia over Maryland, citing the better business tax climate.^[5] In 2015, General Electric and Aetna threatened to decamp from Connecticut if the governor signed a budget that would increase corporate tax burdens, and General Electric actually did so.^[6] Anecdotes such as these reinforce what we know from economic theory: taxes matter to businesses, and those places with the most competitive tax systems will reap the benefits of business-friendly tax climates. Tax competition is an unpleasant reality for state revenue and budget officials, but it is an effective restraint on state and local taxes. When a state imposes higher taxes than a neighboring state, businesses will cross the border to some extent. Therefore, states with more competitive tax systems score well in the Index, because they are best suited to generate economic growth. State lawmakers are mindful of their states’ business tax climates, but they are sometimes tempted to lure business with lucrative tax incentives and subsidies instead of broad-based tax reform. This can be a dangerous proposition, as the example of Dell Computers and North Carolina illustrates. North Carolina agreed to $240 million worth of incentives to lure Dell to the state. Many of the incentives came in the form of tax credits from the state and local governments. Unfortunately, Dell announced in 2009 that it would be closing the plant after only four years of operations.^[7] A 2007 USA TODAY article chronicled similar problems other states have had with companies that receive generous tax incentives.^[8] Lawmakers create these deals under the banner of job creation and economic development, but the truth is that if a state needs to offer such packages, it is most likely covering for an undesirable business tax climate. A far more effective approach is the systematic improvement of the state’s business tax climate for the long term to improve the state’s competitiveness. When assessing which changes to make, lawmakers need to remember two rules:

1. Taxes matter to business. Business taxes affect business decisions, job creation and retention, plant location, competitiveness, the transparency of the tax system, and the long-term health of a state’s economy. Most importantly, taxes diminish profits. If taxes take a larger portion of profits, that cost is passed along to either consumers (through higher prices), employees (through lower wages or fewer jobs), or shareholders (through lower dividends or share value), or some combination of the above. Thus, a state with lower tax costs will be more attractive to business investment and more likely to experience economic growth.
2. States do not enact tax changes (increases or cuts) in a vacuum. Every tax law will in some way change a state’s competitive position relative to its immediate neighbors, its region, and even globally. Ultimately, it will affect the state’s national standing as a place to live and to do business. Entrepreneurial states can take advantage of the tax increases of their neighbors to lure businesses out of high-tax states.

To some extent, tax-induced economic distortions are a fact of life, but policymakers should strive to maximize the occasions when businesses and individuals are guided by business principles and minimize those cases where economic decisions are influenced, micromanaged, or even dictated by a tax system. The more riddled a tax system is with politically motivated preferences, the less likely it is that business decisions will be made in response to market forces. The Index rewards those states that minimize tax-induced economic distortions. Ranking the competitiveness of 50 very different tax systems presents many challenges, especially when a state dispenses with a major tax entirely. Should Indiana’s tax system, which includes three relatively neutral taxes on sales, individual income, and corporate income, be considered more or less competitive than Alaska’s tax system, which includes a particularly burdensome corporate income tax but no statewide tax on individual income or sales? The Indexdeals with such questions by comparing the states on more than 100 variables in the five major areas of taxation (corporate taxes, individual income taxes, sales taxes, unemployment insurance taxes, and property taxes) and then adding the results to yield a final, overall ranking. This approach rewards states on particularly strong aspects of their tax systems (or penalizes them on particularly weak aspects), while also measuring the general competitiveness of their overall tax systems. The result is a score that can be compared to other states’ scores. Ultimately, both Alaska and Indiana score well.

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