New Jersey Has Nation’s Worst Business Tax Climate

Published December 1, 2008

The Tax Foundation’s 2009 State Business Tax Climate Index, the sixth annual report ranking the 50 states on the business-friendliness of their tax codes, finds New Jersey has the worst business tax climate in the nation … for the second year in a row.

The organization released the index in October in Trenton, New Jersey to highlight the Garden State’s earning the worst overall score.

Like most states with poor scores, New Jersey applies high tax rates to narrow tax bases under complex rules that distort the state’s economy. States with high scores apply low tax rates to broad tax bases, and they often do not impose one or more of the major taxes.

Each of this year’s 10 top-scoring states refrains from imposing a corporate income tax, personal income tax, or sales tax.

Lawmakers Have Control

The index ratings are based on tax rates and statutes, not tax collections. Everything rated is directly under legislative control, and legislators are fully empowered to determine their own scores.

The index also shows what legislative changes would improve states’ standing, and by how much.

In addition, the index shows in real time when states improve or worsen their tax climates.

For example, for fiscal year 2009 Maryland raised its personal income tax, retail sales tax, corporate income tax, and cigarette tax, all by substantial margins. As a result, the state fell from 24th on the 2008 index to 45th this year.

Utah, Rhode Island Improve

On the brighter side, Utah and Rhode Island implemented positive tax reforms, both moving to flat personal income taxes (an optional one, in Rhode Island’s case).

Utah improved five spots from 16th to 11th, and Rhode Island improved three, from 49th to 46th.

Kansas and Pennsylvania also benefitted, by reducing their corporate franchise taxes, and Louisiana’s score rose because the state repealed its gift tax.

Solutions Offered

At the Trenton briefing, Tax Foundation analysts recommended actions legislators could take to improve New Jersey’s business tax climate.

Those recommendations included broadening the sales tax base, currently the third-narrowest among the 45 states that levy a sales tax. This narrow base, which excludes goods from food and clothing to Bibles and coffins, requires New Jersey to levy a 7 percent rate to generate adequate revenue. This ties New Jersey for the highest sales tax rate among states without local sales taxes.

The organization also recommended the state reconsider its onerous realty transfer taxes, reduce tax complexity, cut tax rates, and apply those lower rates to broader bases.

While broad-based tax cuts may not be on the table at a time when state governments, including New Jersey’s, are facing severe budget crunches, the organization pointed out the best long-term strategy to improve the state’s tax climate is to cut tax rates and apply them to broad bases.

Josh Barro ([email protected]) is a staff economist at the Tax Foundation.

For more information …

The Tax Foundation’s 2009 State Business Tax Climate Index: