The 10 Best State Business Tax Climates by the Tax Foundation

About four times a year, the Tax Foundation publishes a paper to explore an economic issue explored by economists and scholars.  The foundation is a nonprofit organization for public education and has been in existence since 1937.  The 2010 version of the State Business Tax Climate Index has been released to help lawmakers, business owners, media and individuals determine which states are more friendly to conduct business in, and which states may not.  How does your states’ business climate measure up to other states?

The Small Business Tax Climate Index (SBTCI) can be used by policymakers for determining what changes need to be made to their tax systems to improve the state in relation to other states.

The Top Ten States With The Best Business Tax Climate (2012):

1.    South Dakota
2.    Wyoming
3.    Alaska
4.    Nevada
5.    Florida
6.    Montana
7.    New Hampshire
8.    Delaware
9.    Washington
10. Utah

States which are known to have good tax systems for businesses will obviously have an easier time attracting new businesses.  They’ll have stronger employment growth and better economies than states with a lower quality business tax climate in general.

Tax competition between neighboring states puts a restraint on both state and local taxes.  Some businesses will literally cross the border in order to reside in a more competitive business tax state. Of course, there are more than taxes that affect the business climate of a state.  Whether or not a state has access to raw materials, skilled workers, a strong education system, and perception of a state’s quality of life all come into play when one may consider location to start a business.  However, as opposed to state taxes, these factors cannot be modified by the state government, so thus lawmakers try to improve their tax systems in order to attract potential business owners.

Calculation of the State Business Tax Climate Index

How did the states above achieve the top “10” business tax climate?  Calculation of the SBTCI involves 112 variables within 5 component indexes.  Each index measures a different sector of the state’s tax climate for businesses, and include:

• Corporate Tax Index
• Individual Income Tax Index
• Sales Tax Index
• Unemployment Tax Index
• Property Tax Index

Each of the five component indexes receives a score between 0 and 10, with 10 being the best. The total score for the state is then calculated.  The higher the state score, the more favorable that state’s tax system is for businesses.

The Ten States With The Worst Business Tax Climate:

41. Vermont
42. Wisconsin
43. Minnesota
44. Rhode Island
45. Maryland
46. Iowa
47. Ohio
48. California
49. New York
50. New Jersey

It is important to be aware of all that affects a business when making the decision of where to conduct. While State taxes should not be a sole consideration for business endeavors, they can have a significant impact on profit and should be realized. With the help of the tax foundation, hopefully, your decision as to where to open or move your business has become slightly easier.