Special Report

Most and Least Tax-Friendly States for Business

The least tax-friendly states.

10. Iowa
> State sales tax rate: 6.00% (tied-16th highest)
> Property taxes collected per capita: $1,430 (18th highest)
> Unemployment rate: 4.6% (6th lowest)
> Top income tax rate: 8.98%

Iowa is the 10th least tax-friendly state for business, according to The Tax Foundation. Iowa scored second-lowest for corporate tax policies. This is largely because of the state’s top corporate income tax rate of 12%, which is the highest nationwide. Iowa was also one of just eight states levying an alternative minimum tax (AMT) on corporations. While the tax was designed to ensure corporations paid a minimum tax each year, the tax adds complexity and is considered to be inefficient by The Tax Foundation. Most states with multiple-bracket income tax codes ensure inflation is accounted for in determining tax brackets. Iowa’s system, however, is not indexed to inflation, one of only 16 states where peoples’ tax rates might increase due to inflation alone.

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9. Connecticut
> State sales tax rate: 6.35% (11th highest)
> Property taxes collected per capita: $2,580 (2nd highest)
> Unemployment rate: 7.8% (13th highest)
> Top income tax rate: 6.70%

Of the five categories reviewed by The Tax Foundation, Connecticut received its lowest score for property tax policies. The state collected nearly $2,600 in property taxes per resident in the most recent tax season, more than in all but one other state. Additionally, Connecticut was the only state to levy a gift tax. Gift taxes are often intended to prevent people from dodging the estate tax by giving their property away before they die. Connecticut also levies among the nation’s highest excise taxes. Diesel fuel, for example, is taxed at 55 cents per gallon, higher than in any other state. And cigarettes taxes add an additional $3.40 to the cost of a pack, the fourth highest such tax nationwide.

8. Wisconsin
> State sales tax rate: 5.00% (17th lowest)
> Property taxes collected per capita: $1,724 (12th highest)
> Unemployment rate: 6.7% (23rd lowest)
> Top income tax rate: 7.65%

While beer is taxed just at six cents per gallon in Wisconsin, nearly the lowest beer tax nationwide, other excise taxes are remarkably high compared to other states. Gasoline and diesel are taxed at 33 cents per gallon, among the highest figures nationwide. Also, like most of the least tax-friendly states, tobacco is highly taxed, at $2.52 per pack of cigarettes, the 10th highest surcharge in the country. While Wisconsin’s property tax policy was rated worse than most states, the state’s property tax rank improved from the previous year after it recently repealed its inventory tax on rental property.

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7. Ohio
> State sales tax rate: 5.75% (24th lowest)
> Property taxes collected per capita: $1,140 (22nd lowest)
> Unemployment rate: 7.4% (19th highest)
> Top income tax rate: 5.33%

In most states, corporate taxes are levied on profits. Ohio, however, has a gross receipts tax, which The Tax Foundation considers to be especially harmful for many businesses. As a result, Ohio scored third worst in the corporate tax category. Ohio also fared among the worst in the individual income tax category because of its relatively large number of tax brackets, and for temporarily suspending bracket indexing, which adjusts the bracket thresholds for inflation. Like most of the least tax-friendly states for business, excise taxes are particularly high in Ohio. Gasoline and diesel, for example, are each taxed at 28 cents per gallon, among the highest rates nationwide. While most of Ohio’s major tax policies scored very poorly, its unemployment insurance tax policies ranked better than all but four other states.

6. Rhode Island
> State sales tax rate: 7.00% (tied-2nd highest)
> Property taxes collected per capita: $2,161 (7th highest)
> Unemployment rate: 9.5% (2nd highest)
> Top income tax rate: 5.99%

Rhode Island residents each paid $2,161 in property taxes on average, or nearly 5% of a typical personal income, among the highest figures in the nation. The state’s general sales tax rate of 7% is also higher than in the vast majority of states. In addition to sales taxes, consumers have to pay additional high excise taxes on certain goods. Gasoline and diesel, for instance, are each taxed at 33 cents per gallon, among the highest rates nationwide. In addition, while beer is taxed at just 11 cents per gallon — one of the lower beer tax rates — cigarettes are taxed at $3.50 per pack, higher than in all but two other states. Like all of the least tax-friendly states, Rhode Island’s individual income tax system was rated worse than most. A reduction in the state’s corporate income tax from 9% to 7% will not take effect until January 1, 2015, and is not reflected in The Tax Foundation’s report.