Citing U.S. Department of Labor statistics showing job relocation to other states is twice as common as “outsourcing” abroad, a new study by the Tax Foundation examines the role of business tax climates in the shifting of economic activity.
The new study, “State Business Tax Climate Index,” ranks the 50 states on how “business friendly” their tax systems are, providing a roadmap for state lawmakers concerned with keeping their states tax-competitive.
According to the index, the 10 states that began 2004 with the most business-friendly tax systems were Alaska, Colorado, Florida, Nevada, New Hampshire, Oregon, South Dakota, Texas, Washington, and Wyoming.
“Nearly all of the best states raise sufficient revenue without imposing at least one of the three major state taxes: sales taxes, personal income taxes, and corporate income taxes,” said Scott Hodge, president of the Tax Foundation and coauthor of the study. Four of the top 10–Alaska, South Dakota, Washington, and Wyoming–each have only one of the three taxes.
The 10 states with the least hospitable business tax climates are Arkansas, Hawaii, Kentucky, Maine, Minnesota, New York, Rhode Island, Vermont, West Virginia, and Wisconsin. The study authors say the worst state tax codes tend to have the following:
- 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; and
- high overall state tax collections with few tax or expenditure controls.
“The ideal tax system, whether at the state, federal, or international level, should be neutral to business activity,” said Hodge. “In such a system, people would base their economic decisions on the merits of the transactions rather than the tax implications.”
The overall index is composed of five specific indices devoted to major features of a state’s tax system: the corporate income tax, individual income tax, sales or gross receipts tax, unemployment insurance tax, and the state’s fiscal balance. Those five indices are themselves composed of several sub-indices. Overall, the index consists of five specific indices, 10 sub-indices, 33 categories, and 109 variables.
Each state’s laws and tax collections were assessed as of January 1, 2004 and therefore reflect the business tax climate for the current year, but without consideration of 2004 legislative action. While the index is comprehensive, it is not exhaustive. Future research into state taxation will lead to new variables and sub-indices in future editions of the index, Hodge said.
William Ahern ([email protected]) is director of communications at the Tax Foundation.
For more information …
The Tax Foundation study, “State Business Tax Climate Index,” is available on the group’s Web site at http://www.taxfoundation.org/bp45.pdf.
