Last week, the Tax Foundation released its State Business Tax Climate Index for 2016. This annual report ranks all fifty states (plus D.C.) on how hospitable their tax systems are to businesses.
Many factors affect a business’s ability to succeed, including prudent tax policy. While improvements to other important business factors, such as the workforce or in transportation, can take years to accomplish, improvements in tax policy can take place relatively quickly.
The Tax Foundation index uses five different taxes as criteria in producing the rankings: individual income taxes, sales taxes, corporate income taxes, property taxes, and unemployment insurance taxes. Each state’s composite score reflects how well each system conforms to the key components of proper tax policy: broad bases and low rates.
Where does your state rank?
Here are some of the highlights:
- Wyoming is the most business-friendly state for the fifth straight year, with South Dakota, Alaska, Florida, and Nevada rounding out the top five. None of these states has an individual income tax. Wyoming, South Dakota, and Nevada additionally have no corporate income tax, and Alaska has no sales tax.
- New Jersey once again scored the worst, stifling business activity with its punitive 5.91-percent property tax (the worst in the country after New Hampshire, but New Hampshire goes without income and sales taxes), dual inheritance and estate taxes (Maryland is the only other state that taxes both), and badly structured individual income taxes. New York, California, Minnesota, and Vermont followed New Jersey in the bottom five.
- Illinois boasted the biggest improvement from last year, jumping eight spots from 31st to 23rd. Lawmakers raised Illinois’ individual and corporate rates temporarily in 2011 in order to address the state’s mounting fiscal crisis. These increases, which had given Illinois one of the highest corporate tax rates in the country, were allowed to expire on schedule in 2015.
While other factors certainly play a role, lower tax burdens generally foster economic growth and wealth creation by attracting new businesses, and, by extension, investment capital and jobs. Evidence shows that states at the top of the business tax climate index experience higher economic growth and lower average unemployment than states at the bottom. States should strive to improve upon their rankings to make themselves a more attractive place for businesses.