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Study Ranks States’ Tax Climates for 2011

South Dakota Still Best for Taxes; New Jersey Emerges from Cellar

WASHINGTON, D.C.-The Tax Foundation has released the newest edition of the State Business Tax Climate Index, which ranks from 1 (best) to 50 (worst) the tax systems of the 50 states. South Dakota's tax system is most welcoming to economic activity while New York's tax code ranks 50th as the least hospitable.     

"States do not enact tax changes in a vacuum," said Scott Hodge, president of the Tax Foundation. "Every tax change will affect a state's competitive position relative to its neighbors."     

The goal of the index is to focus lawmakers' attention on the importance of good tax fundamentals: enacting low tax rates and granting as few deductions, exemptions and credits as possible. This "broad base, low rate" approach is the antithesis of most efforts by state economic development departments who specialize in designing "packages" of short-term tax abatements, exemptions, and other give-aways for prospective employers who have announced that they would consider relocating. Those packages routinely include such large state and local exemptions that resident businesses must pay higher taxes to make up for the lost revenue.     

"The temptation is for state lawmakers to lure high-profile companies with packages of tax bonuses," said Kail Padgitt, Ph.D., the author of the 2011 edition of the Index, "but that strategy often backfires if the company does not prosper."     

Even states with excellent business tax climates trot out extra tax incentives. This year, when Northrop Grumman announced that it would relocate its headquarters to the Washington, DC, area, a bidding war ensued. Even though Virginia was the prohibitive favorite because it has a more hospitable tax climate than Maryland or the District of Columbia and because Northrop Grumman is already its largest private employer, all three jurisdictions spent a great deal of time and effort assembling massive packages of tax and spending incentives, which the firm quite rationally accepted from Virginia. Best and Worst Tax Climates The ten states that had the best tax climates on the first day of the 2011 fiscal year (July 1, 2010), were South Dakota, Alaska, Wyoming, Nevada, Florida, Montana, New Hampshire, Delaware, Utah and Indiana.      "The top eight tax systems all raise sufficient revenue without imposing one or two of the three major state taxes-sales taxes, personal income taxes and corporate income taxes," said Hodge.     

The ten states with the least hospitable business tax climates are, from 50th to 41st best: New York, California, New Jersey, Connecticut, Ohio, Iowa, Maryland, Minnesota, Rhode Island and North Carolina.     

The worst state tax codes tend to have:
  • 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 property tax collections as a percentage of personal income.
How it Works The methodology of the State Business Tax Climate Index is centered on the idea of economic neutrality. If a state's tax system maintains a "level playing field" for businesses, the index considers it neutral and ranks it highly. However, each state's final score depends on a comparison with the other 49 states. The overall index is composed of five specific indexes devoted to major features of a state's tax system: 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. Each of these five indexes is composed of several sub-indexes.     

Each state's laws and tax collections were assessed as of July 1, 2010, the first day of the 2011 fiscal year. Newer tax changes are the subject of commentary in an appendix but are not tallied in the scores and rankings. Tax Foundation Background Paper No. 60, "2011 State Business Tax Climate Index," is available online at http://www.taxfoundation.org at 1pm ET on Tuesday, October 26.

The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.
State Business Tax Climate Index Fiscal Year 2011 2011 Rank 2010 Rank Change from 2010 to 2011 2009 Rank 2008 Rank 2007 Rank 2006 Rank Alabama 28 19 - 9 20 23 22 16 Alaska 2 3 + 1 4 3 4 3 Arizona 34 28 - 6 24 25 29 29 Arkansas 39 40 + 1 35 37 36 35 California 49 48 - 1 49 49 48 42 Colorado 15 13 - 2 13 10 11 13 Connecticut 47 38 - 9 37 38 39 41 Delaware 8 8 0 10 9 8 9 Florida 5 5 0 5 5 5 5 Georgia 25 29 + 4 27 28 21 20 Hawaii 22 24 + 2 22 18 16 24 Idaho 18 18 0 29 21 26 30 Illinois 23 30 + 7 23 24 31 26 Indiana 10 12 + 2 14 13 12 12 Iowa 45 46 + 1 44 46 45 44 Kansas 35 32 - 3 31 31 35 33 Kentucky 19 20 + 1 34 27 28 38 Louisiana 36 35 - 1 33 34 33 32 Maine 31 34 + 3 40 35 37 43 Maryland 44 45 + 1 45 47 24 25 Massachusetts 32 36 + 4 32 33 34 36 Michigan 17 17 0 21 17 23 28 Minnesota 43 43 0 41 42 43 39 Mississippi 21 21 0 19 22 19 19 Missouri 16 16 0 16 16 15 14 Montana 6 6 0 6 6 6 8 Nebraska 29 33 + 4 42 40 41 45 Nevada 4 4 0 3 4 3 4 New Hampshire 7 7 0 7 7 7 6 New Jersey 48 50 + 2 50 50 50 48 New Mexico 33 23 - 10 26 29 25 23 New York 50 49 - 1 47 45 46 49 North Carolina 41 39 - 2 39 41 42 40 North Dakota 20 25 + 5 30 32 32 31 Ohio 46 47 + 1 48 48 47 47 Oklahoma 30 31 + 1 18 19 20 21 Oregon 14 14 0 8 8 9 10 Pennsylvania 26 27 + 1 28 30 30 22 Rhode Island 42 44 + 2 46 44 49 50 South Carolina 24 26 + 2 25 26 27 27 South Dakota 1 1 0 2 2 2 2 Tennessee 27 22 - 5 17 20 17 18 Texas 13 11 - 2 9 11 10 7 Utah 9 10 + 1 11 12 18 15 Vermont 38 41 + 3 43 43 44 46 Virginia 12 15 + 3 15 15 14 17 Washington 11 9 - 2 12 14 13 11 West Virginia 37 37 0 36 36 38 34 Wisconsin 40 42 + 2 38 39 40 37 Wyoming 3 2 - 1 1 1 1 1 Table 2 Major Components of the State Business Tax Climate Index, FY 2011 State Overall Rank Corporate Tax Index Rank Individual Income Tax Index Rank Sales Tax Index Rank Unem-ployment Insurance Tax Index Rank Property Tax Index Rank Alabama 28 24 18 40 10 9 Alaska 2 26 1 5 31 12 Arizona 34 22 23 48 2 6 Arkansas 39 40 33 41 18 21 California 49 33 48 49 14 16 Colorado 15 12 16 29 17 15 Connecticut 47 18 47 26 30 49 Delaware 8 49 34 2 8 8 Florida 5 15 1 30 3 28 Georgia 25 8 30 23 22 38 Hawaii 22 10 41 10 23 14 Idaho 18 17 29 12 48 2 Illinois 23 27 9 39 41 39 Indiana 10 21 11 20 12 4 Iowa 45 47 42 31 33 34 Kansas 35 35 21 32 7 41 Kentucky 19 42 32 7 34 20 Louisiana 36 19 26 46 5 22 Maine 31 43 37 6 44 26 Maryland 44 14 49 11 47 40 Massachusetts 32 36 15 24 49 43 Michigan 17 48 12 9 45 32 Minnesota 43 44 38 38 39 18 Mississippi 21 13 19 33 4 31 Missouri 16 5 25 15 9 11 Montana 6 16 22 3 19 10 Nebraska 29 34 31 17 13 24 Nevada 4 3 6 43 40 17 New Hampshire 7 50 10 1 38 35 New Jersey 48 41 45 36 27 48 New Mexico 33 31 20 45 16 1 New York 50 20 50 34 46 42 North Carolina 41 25 36 44 6 33 North Dakota 20 30 28 18 20 7 Ohio 46 39 44 35 11 45 Oklahoma 30 7 24 42 1 27 Oregon 14 45 46 4 37 5 Pennsylvania 26 38 14 28 42 44 Rhode Island 42 37 35 14 50 47 South Carolina 24 9 27 22 43 23 South Dakota 1 1 1 25 36 13 Tennessee 27 11 8 47 35 50 Texas 13 46 7 37 15 29 Utah 9 6 13 27 24 3 Vermont 38 28 40 16 21 36 Virginia 12 4 17 8 29 25 Washington 11 32 1 50 25 19 West Virginia 37 23 39 21 32 37 Wisconsin 40 29 43 19 26 30 Wyoming 3 1 1 13 28 46 Note: Rankings do not average across to total. States without a given tax rank equally as number 1. Source: Tax Foundation

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