This page summarizes how the Index is built. It is adapted from the methodology chapter and the methodological changes section of the full report, which defines every variable.
Structure
The Index is built from five components: individual income taxes, sales and excise taxes, corporate taxes, property and wealth taxes, and unemployment insurance taxes. Guided by the economic literature, each component scores a state’s tax competitiveness on a scale of 0 (worst) to 10 (best). Each component covers one major area of state taxation and includes many tax rate and tax base variables. In all, the report measures 159 variables.
Weighting
The five components are not weighted equally. Each one’s weight comes from how much the 50 states’ scores vary on it: the more the scores spread out, the heavier the weight. This year’s weights are:
- Individual Income Taxes: 30.2%
- Sales Taxes: 21.7%
- Corporate Taxes: 21.3%
- Property Taxes: 15.2%
- Unemployment Insurance Taxes: 11.6%
Weighting this way makes the Index more useful. Where state scores differ a lot, some states have real competitive advantages, and businesses comparing locations give taxes more weight when the differences are large. Where scores cluster close together, businesses are more likely to set taxes aside.
Delaware, for example, has a large advantage on sales taxes: its rate of zero draws businesses and shoppers from across the Mid-Atlantic, and that pull grows every time another state raises its sales tax. Texas has no individual or corporate income tax, though it imposes an uncompetitive margins tax on gross receipts; when other states raise their income taxes, Texas looks better still. Unemployment insurance taxes, by contrast, are fairly similar nationwide, so a small change in one state’s law can move its component rank a lot but, given the weights, its overall rank only a little.
Rate and Base Subindices
Each component has two equally weighted subindices: one for tax rates and one for tax bases. Each subindex is made of one or more variables. Some are yes-or-no variables, scored 0 or 1, for provisions such as whether a state adjusts its brackets for inflation or offers job or research and development credits. Others are measured on a scale: tax rates, how progressive a tax is, effective tax burdens (in the property and unemployment insurance components), and other provisions.
A Relative Index
The Index compares states with each other rather than with an ideal tax system. Each variable is scored against the range of values across the states. On the 0 to 10 scale, a zero means the worst among the 50 states, not the worst possible. Many states’ rates are so close together that an absolute scale would say little about the differences between them, especially for business owners and individuals who want to know which states have the best system in their region.
States without a Tax
A relative scale cannot compare a state that has a tax with a state that has none. A zero rate is the lowest possible rate and the most neutral base, so states with no individual income, corporate income, or sales tax gain a large advantage. Those states generally score 10 on that tax, and the Index measures the other states against each other.
There are three exceptions. Washington does not tax wage income but taxes capital gains at various rates, so the Index uses an implied rate, as it did for the now-repealed taxes on interest and dividends in New Hampshire and Tennessee. In Nevada, a payroll tax levied for purposes other than unemployment insurance counts in the individual income tax component. And the states without a sales tax (Alaska, Delaware, Montana, New Hampshire, and Oregon) still do not score a perfect 10 on that component, because it also counts excise taxes on gasoline, beer, and other products. Alaska has no state sales tax but lets localities levy one.
Making Scores Comparable across Components
Average scores differ from one component to the next, which changes how much it is worth to go without a given tax. Before adjustment, the corporate component averages 7.39 and the sales tax component 5.68. So each component’s scores are multiplied by a constant that brings its average to 5.00, leaving out states without that tax. After this step, a state’s scores can be compared across components: Connecticut’s 5.01 on corporate taxes is better than its 3.82 on individual income taxes.
Snapshot Date
The Index measures each state’s tax law as of July 1, the start of most states’ fiscal year. This 2027 edition reflects tax law as of July 1, 2026, the first day of fiscal year 2027 for most states. Changes adopted after that date will appear in a future edition.
The District of Columbia
DC is included for comparison only. Its scores and ranks do not affect the scores or ranks of the 50 states, which is why this tool marks DC’s ranks with an asterisk.
Past Rankings and Scores
The report includes rankings for 2020 through 2026 so they can be compared with 2027. These differ from rankings published earlier, including every edition of the State Business Tax Climate Index, because of laws applied retroactively, earlier years recalculated under the current method, and corrections made since the last report. The scores and rankings shown here are the definitive ones.
What Changed in the 2027 Edition
The 2027 edition adds variables to the corporate income, individual income, and sales tax components. Most of them describe more fully how states conform to the federal tax code.
Conformity to the federal tax code. For both individual and corporate income taxes, a new variable scores how each state follows the federal tax code. States that automatically follow the current code (rolling conformity) get full credit, states that follow the current code as of a fixed date (static conformity) get partial credit, and states that follow it selectively or as of an older date get none. Not every federal change is right for a state, but staying close to the federal code generally makes state taxes simpler to administer, because the state and federal systems share definitions, instructions, information, and rulings.
Corporate taxes. The One Big Beautiful Bill Act (OBBBA) changed or added several expensing provisions, so the capital part of the corporate tax base now includes conformity to Section 168(n) and Section 174. To make room for the new variables, the four parts of the corporate tax base are no longer weighted equally. They now count for 15 percent (credits), 20 percent (net operating losses), 45 percent (capital, including Section 168(n) and Section 174), and 20 percent (other base rules, including the state’s general conformity method). The weight of the gross receipts tax is unchanged.
Individual income taxes. The individual income tax now tracks which states follow the federal deductions for tips and overtime pay. These deductions narrow the tax base, so states that adopt them score lower.
Sales taxes. The sales tax base now includes whether a state exempts data center machinery and equipment from the sales tax. Like other business inputs, these purchases should be exempt.
