While taxation continues to be a hot-button issue in our nation’s capital as the year ends, federal taxes aren’t the only ones small business owners have to worry about. The Tax Foundation recently released its 2011 State Business Tax Climate Index, which ranks the tax systems of the 50 states.
The Tax Foundation’s report aims to focus lawmakers' attention on the importance of tax fundamentals: enacting low tax rates and granting as few deductions, exemptions, and credits as possible. “The ideal tax system… is simple, transparent, stable, neutral to business activity, and pro-growth,” writes study author Kail Padgitt, Ph.D. “In such an ideal system, individuals and businesses would spend a minimum amount of resources to comply with the tax system, understand the true cost of the tax system, base their economic decisions solely on the merits of the transactions, without regard to tax implications, and not have the tax system impede their growth and prosperity.”
The study compared the states on five aspects of their tax systems: the state's major business tax, whether a corporate income tax or a gross receipts tax; the individual income tax; the general and selective sales taxes; the unemployment insurance tax; and asset-based taxes including property taxes. The total results created an overall ranking.
The 10 states with the best tax climates (as of July 1, 2010) were South Dakota, Alaska, Wyoming, Nevada, Florida, Montana, New Hampshire, Delaware, Utah and Indiana.
The 10 states with the worst business tax climates (as of July 1, 2010) are, from 50th to 41st best: New York, California, New Jersey, Connecticut, Ohio, Iowa, Maryland, Minnesota, Rhode Island, and North Carolina.
What did the worst states have in common?
- Complex, multi-rate corporate and individual income taxes with above-average tax rates.
- Above-average sales tax rates that don't exempt business-to-business purchases.
- Complex, high-rate unemployment tax systems.
- High property tax collections as a percentage of personal income.
Despite the attention given to federal taxes in the media, the Tax Foundation reminds us that state taxes often have more of an effect on business in the long run. Why? Because while jobs are rapidly being created overseas, businesses are more likely to move from one state to another than from one state to another country. Differences in state taxes can be a huge influence.
But while state and local economic development departments often seek to offer tax credits, exemptions and incentives for certain types of activity or certain kinds of businesses, the Tax Foundation contends that in the long run, these offerings cause more problems than they solve. “Lawmakers create these deals under the banner of job creation and economic development, but the truth is that if a state needs to offer such packages, it is most likely covering for a woeful business tax climate,” writes Padgitt. “A far more effective approach is to systematically improve the business tax climate for the long term so as to improve the state's competitiveness.”
What do you think? Has your company benefited from incentives or exemptions—or would you benefit more from a simplified tax system?
Read the full report and find out where your state falls at the Tax Foundation website.