EspañolOn October 28, the Tax Foundation released their 2015 State Business Tax Climate Index, which analyzes the tax systems of all 50 US states and the District of Columbia. The index offers a ranking of the best states to do business in the country, based on the local tax burden — providing businessmen, politicians, and taxpayers a guide for improving future tax legislation.

The foundation evaluated states using five parameters: individual income tax, sales tax, corporate tax rates, property tax, and unemployment insurance — assigning a score of 1 to 10 based on these factors, with a higher tax burden meaning a lower score.

The index ranks Wyoming, South Dakota, Nevada, Alaska, Florida, Montana, New Hampshire, Indiana, Utah, and Texas in its top 10. Although each of these states tax both property and unemployment insurance, many of them lack corporate, income, or sales taxes, causing their overall tax burden to be lower than others.

The index places Iowa, Connecticut, Wisconsin, Ohio, Rhode Island, Vermont, Minnesota, California, New York, and New Jersey in its bottom 10, indicating they are states with the highest tax burden. Tax rates in these states are far from neutral, with both high property and inheritance taxes, as well as an elevated individual income tax rate.

North Carolina has made great strides in reducing the tax burden of its residents, rising from 44th to 16th on the list over the past year. The change can be attributed to a packet of reforms that improved the state’s corporate, sales, and income tax rates. North Carolina is expected to continue climbing the rankings as the new tax measures begin to take effect. Kansas, Nebraska, and North Dakota also improved their rankings over the past year.

Keys to Successful Tax Legislation

Nevada, South Dakota, Wyoming, Missouri, and Utah offer the most hospitable tax climate for businesses. On the other hand, Delaware, Illinois, Iowa, New Hampshire, and Maine received the lowest grades.

While most US states tax corporate earnings, Nevada, South Dakota, and Wyoming do not, for which the Tax Foundation rewards them with a perfect score. Iowa currently has the heaviest corporate tax burden at 12 percent, followed by Pennsylvania at 9.99 percent.

According to the foundation, the individual income tax acts as a disincentive for entrepreneurship and investment, and leads to increased costs in hiring new personnel. The index acknowledges 5 states with no personal income tax with perfect scores: Florida, Alaska, Nevada, South Dakota, and Wyoming.

The report notes that while Texas and Washington do not have an individual income tax, they do tax LLC and S Corp income through their gross receipts taxes.

California, New Jersey, Ohio, New York, and Maryland have the highest individual income tax rates in the United States, ranging between 8.82 and 13.3 percent.

Effects of Sales, Property, and Unemployment Taxes

Along with corporate regulations, both sales and property taxes have a direct effect on where individuals and corporations chose to do business. Consumers pay sales taxes the moment something is purchased in the store. As these tax rates increase, consumers either reduce spending or look elsewhere to buy their products.

The latter is evidenced when US residents chose to purchase goods from neighboring states, rather than paying elevated sales tax at home. Higher tax rates reduce a business’s profits, effectively reducing the number of employees that can be hired, and ultimately limiting a state’s tax revenues.

However, the foundation notes that consumers are able to easily detect sales taxes. Since sales tax is completely distinct from the price of the product itself, residents are able to more easily voice their concerns and call for changes in tax law — something that cannot be done so easily with taxes that are levied during the production process.

Alaska, Delaware, New Hampshire, Oregon, and Montana do not have a state sales tax, while Louisiana, Arizona, New Jersey, and Tennessee have the highest sales tax rates in the country.

Property taxes are levied on the value and transfer of physical or financial assets. New Mexico, North Dakota, and Indiana have the most favorable property tax rates, while New Jersey, Vermont, and Rhode Island have the worst.

Unemployment tax is a social security program that requires employers to pay salary benefits to recently laid off employees. The Tax Foundation believes this little-known form of taxation can create financially untenable situations for struggling businesses.

Oklahoma, Delaware, Florida, Arizona, and Ohio have the lowest rates of unemployment insurance taxation, while Pennsylvania, Rhode Island, Massachusetts, Michigan, and Idaho have the highest tax burden in this regard.