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How Corporate Taxes Impact the Business Climate

November 2012
“Taxes are a fact of life,” the Tax Foundation states in a new background paper, but “not all tax systems are created equal.” With that in mind, the organization sets out every year to rank U.S. states in its “State Business Climate Tax Index.”

Every state levies property and unemployment insurance taxes, but many get by without at least one of the other major kinds of taxes that businesses face, such as corporate, individual income or sales taxes. There’s no corporate income tax in Wyoming, South Dakota, or Nevada, nor an individual income tax, and that’s a key reason why those states rank 1, 2 and 3 on the latest index. According to the foundation, Alaska doesn’t have an individual income tax or a state-level sales tax, and as a result lands in the #4 slot, while Florida rides its lack of an individual income tax to the #5 position.

Here’s the complete top 10 in the Tax Foundation’s 2013 State Business Climate Tax Index:

  • 1. Wyoming

  • 2. South Dakota

  • 3. Nevada

  • 4. Alaska

  • 5. Florida

  • 6. Washington

  • 7. New Hampshire

  • 8. Montana

  • 9. Texas

  • 10. Utah

On the other hand, states with a high rate on at least one major tax are likely to compare unfavorably. New York places last on the overall list, thanks in large part to its high income, unemployment insurance, and property taxes. Here’s the bottom 10 on the Tax Foundation’s list:

  • 41. Maryland

  • 42. Iowa

  • 43. Wisconsin

  • 44. North Carolina

  • 45. Minnesota

  • 46. Rhode Island

  • 47. Vermont

  • 48. California

  • 49. New Jersey

  • 50. New York

Giving up just one type of tax is often enough to allow a big shift in ranking, the Tax Foundation’s report points out. Maine, for example, repealed its alternative minimum tax and changed the way it treats net operating losses, and as a result jumped from 37th to 30th place. Michigan moved from 18th to 12th after it replaced what the foundation calls a “cumber¬some and distortionary” gross receipts tax and put in place a flat 6 percent corporate income tax with few special preferences.

Why does this matter? Because, as the Tax Foundation report points out, “even in our global economy, states’ stiffest and most direct competition often comes from other states.” Most mass job relocations, according to the Department of Labor, are not to offshore locations but from one state to another. “State lawmakers must be aware of how their states’ business climates match up to their immediate neighbors and to other states within their regions.”

Indeed, the corporate tax environment is one of the major factors considered when Area Development determines the “Top States for Doing Business.” The top state in that ranking, Texas, also lands within the Tax Foundation’s top 10, and heads Area Development’s rankings of best overall business environment and best overall cost of doing business.

Of course, there are plenty of other factors that businesses weigh when choosing a site or considering expansion, including work force and infrastructure strengths as well as incentives. “It is true that taxes are but one factor in business decision-making,” the Tax Foundation acknowledges. On the other hand, it takes a long time to bring about improvements in infrastructure, educational systems and other important factors, but “changes to the tax code can quickly improve a state’s business climate.”

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