According to Census data released this week, state and local tax revenue rose in the U.S, for the 13th quarter in a row. With April 15 less than three weeks away, America’s businesses owners will complete their personal taxes along with the rest of the country. According to the Tax Foundation, a think tank that advocates for lower taxes and a simpler tax code, some states remain much more tax friendly to businesses than others.
The Tax Foundation’s 2013 State Business Tax Climate Index grades all 50 states on 118 different measures to reflect the favorability of their tax structure to businesses. The states that, according to the foundation, have the best business climates generally have lower tax rates, including lower personal and corporate income taxes, and less complicated tax codes. Wyoming has the best business tax climate in the country and New York the worst. Based on the Tax Foundation’s report, these are the most and least tax-friendly states for business.
According to the report, low corporate tax rates are not the only issue that companies consider. Property taxes, for example, are also a major expense for businesses. Low income taxes are attractive to businesses because it is easier to attract employees to such states.
Simple tax structures are also important to companies. According to Scott Drenkard, economist at the Tax Foundation, one of the best ways states achieve this is by eliminating certain taxes altogether. Indeed, all but one of the states with the best tax climates for business do not levy a personal income tax, corporate tax, or sales tax.
One exception is Utah. The state, which has the 10th most favorable business tax climate, levies every kind of tax measured by the report. However, it has flat rates for many of these, which the Tax Foundation considers more manageable. “Even though it has all the major taxes, it structures them in such a way that it is simple and transparent, and people and businesses understand it.”
High tax rates and the presence of certain kinds of taxes are not the only components that make a state favorable for business. Drenkard notes that Delaware, which has the 14th best tax climate for business, “tends to get a lot of businesses that choose to incorporate there, even though there’s a relatively high tax rate.” In particular, it is easy to start a business in Delaware, and the state has a business-friendly regulation.
Not all agree that the Tax Foundation’s portrayal of the business tax climate is a fair reflection of how attractive a state is to businesses. In an interview with 24/7 Wall St., Carl Davis, senior policy analyst at the Institute on Taxation and Economic Policy, explained that the assumption that higher tax rates are bad for business is unfair.
“Taxes exist to fund important government services, and so when a tax rate goes up, that revenue is put to various good uses that businesses benefit hugely from,” Davis said. This includes, things like roads and bridges, an efficient court system, and “well-educated, trained employees with the skills they need to work effectively for their business.”
In fact, some of the states with favorable climates, including Florida, and Nevada, have lower taxes and, as a result, offer residents fewer government benefits. Others, like Wyoming, Montana, and Alaska, have favorable tax climates for business, because they can afford to do so. These states are able to successfully raise cash through taxes on their thriving oil and gas industries. Consequently, despite the absence of many taxes, government benefits are often generous.
States with favorable business tax climates often have low unemployment. All but one of the 10 states with the best tax climates for business had a lower jobless rate in January than the national rate. On the other hand, four of the five states with the worst climates had high unemployment.
However, it would seem that the reason why the states with best tax climates for business have vibrant economies has less to do with their tax structure and more to do with abundant natural resources In fact, five the ten states with the best taxes for business have among the biggest oil and natural gas reserves in the country.
Based on the Tax Foundation’s 2013 State Business Tax Climate Index, 24/7 Wall St. reviewed the 10 states with the best and worst business tax environments. The tax rates and other data the Tax Foundation used to generate the rank have changed slightly in a small number of cases. At the foundation’s direction, 24/7 Wall St. reflected newer numbers when available. Unemployment rates are from the Bureau of Labor Statistics for January 2013. State debt and revenue figures are from the Tax Foundation for fiscal 2011, the most recent available year. Income, poverty, employment composition, and state expenditure data are from the U.S. Census bureau, also from 2011.