Special Report

Most and Least Tax-Friendly States for Business

5. Vermont
> State sales tax rate: 6.00% (tied-16th highest)
> Property taxes collected per capita: $2,197 (5th highest)
> Unemployment rate: 4.4% (tied-4th lowest)
> Top income tax rate: 8.95%

Vermont’s sales tax system scored better than most states. However, with sales tax-free New Hampshire just across the Connecticut River, there may be more at stake for Vermont businesses, as residents can easily cross the border to make purchases in New Hampshire. According to a recent Tax Foundation report, per capita sales among border businesses in New Hampshire roughly tripled since the late 1950s, while per capita sales remained stagnant in Vermont’s border counties. Property taxes in the state are also quite high. In the most recent tax season, Vermonters paid $2,197 on average in property taxes, or 5.3% of a typical personal income, both among the highest figures in the nation.

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4. Minnesota
> State sales tax rate: 6.88% (7th highest)
> Property taxes collected per capita: $1,535 (16th highest)
> Unemployment rate: 5.1% (9th lowest)
> Top income tax rate: 9.85%

Minnesota’s corporate and individual income tax policies are both rated among the worst in the nation. One reason is that Minnesota’s corporate income tax rate of 9.8% is higher than in any other state. Only Washington, D.C. has a higher corporate income tax rate. Minnesota is also penalized for being one of eight states with an alternative minimum tax on corporations. Although this assures companies pay a minimum amount in taxes each year, it does so by creating a parallel tax structure that generates little revenue and adds to tax complexity, The Tax Foundation argues.

3. California
> State sales tax rate: 7.50% (the highest)
> Property taxes collected per capita: $1,426 (19th highest)
> Unemployment rate: 8.9% (4th highest)
> Top income tax rate: 13.30%

California is one of the least tax-friendly states for business in part because of the its policies on individual income taxes. One major reason is that top-earning taxpayers can expect to pay as much as 13.3% of their annual income in state income taxes. This top tax rate affects residents earning $1 million or more. California also has a so-called “marriage penalty,” meaning that the standard deduction and tax bracket thresholds for a married couple filing a joint tax return are less than double what they would be if each spouse filed alone. California is also rated as one of the worst states for sales taxes. Its statewide sales tax rate of 7.5% is the highest in the nation.

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2. New York
> State sales tax rate: 4.00% (7th lowest)
> Property taxes collected per capita: $2,338 (4th highest)
> Unemployment rate: 7.7% (14th highest)
> Top income tax rate: 8.82%

New York’s corporate tax rank improved from a year ago due to the initial phasing-in of recent reforms. The rank is expected to continue to improve considerably after the reforms are fully implemented. Among the changes is the decline in the corporate tax rate from 7.1% to 6.5% once reforms are fully phased-in, and the elimination of the alternative minimum tax for businesses. However, New York still ranks as the second-worst state for individual income tax policy due to its high tax rates for top earners as well as for its income tax recapture provision. This provisions allows New York to “apply the rate of the top income tax bracket to previous taxable income after the taxpayer crosses the top bracket threshold,” according to The Tax Foundation noted, rather than just taxing each dollar earned above the threshold at the new rate.

1. New Jersey
> State sales tax rate: 7.00% (tied-f2nd highest)
> Property taxes collected per capita: $2,896 (the highest)
> Unemployment rate: 8.2% (8th highest)
> Top income tax rate: 8.97%

No state is less tax-friendly for business than New Jersey. The state collected nearly $3,000 per capita in property taxes, or 5.52% of a typical personal income, both the highest figures in the nation. New Jersey is also one of only two states with both an estate tax and an inheritance tax, which levies a tax on the heir of an estate in addition to taxing the estate itself. The Tax Foundation awarded states lower scores if they taxed multiple levels of the production process through a broad sales tax base. New Jersey is one of only a handful of states where sales on numerous business inputs — including utilities, services, and leases — are taxed. Additionally, while New Jersey’s excise taxes on fuel are among the nation’s lowest, the state’s general sales tax of 7% is nearly the highest. Like a majority of the least tax-friendly states, New Jersey’s economy is struggling somewhat, with an unemployment rate of 8.2% last year, versus the national rate of 7.4%.

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