NCPA - National Center for Policy Analysis

Business Tax Climate Index

October 15, 2013

The Tax Foundation's 2014 edition of the State Business Tax Climate Index enables business leaders, government policymakers and taxpayers to gauge how their states' tax systems stack up by comparing the states on over 100 different variables in the five important areas of taxation (major business taxes, individual income taxes, sales taxes, unemployment insurance taxes and property taxes) and then adding the results up to a final, overall ranking, says the Tax Foundation.

The 10 best states in this year's index are: Wyoming, South Dakota, Nevada, Alaska, Florida, Washington, Montana, New Hampshire, Utah and Indiana.

The 10 lowest ranked, or worst, states in this year's index are: Maryland, Connecticut, Wisconsin, North Carolina, Vermont, Rhode Island, Minnesota, California, New Jersey and New York.

Lawmakers create tax systems under the banner of job creation and economic development, but the truth is that if a state needs to offer such packages, it is most likely covering for a woeful business tax climate. A far more effective approach is to systematically improve the business tax climate for the long term so as to improve the state's competitiveness. When assessing which changes to make, lawmakers need to remember two rules:

Taxes matter to business.

  • Business taxes affect business decisions, job creation and retention, plant location, competitiveness, the transparency of the tax system, and the long-term health of a state's economy.
  • Most importantly, taxes diminish profits.
  • If taxes take a larger portion of profits, that cost is passed along to either consumers (through higher prices), employees (through lower wages or fewer jobs), or shareholders (through lower dividends or share value).
  • Thus, a state with lower tax costs will be more attractive to business investment and more likely to experience economic growth.

States do not enact tax changes (increases or cuts) in a vacuum.

  • Every tax law will in some way change a state's competitive position relative to its immediate neighbors, its geographic region and even globally.
  • Ultimately, it will affect the state's national standing as a place to live and to do business.
  • Entrepreneurial states can take advantage of the tax increases of their neighbors to lure businesses out of high-tax states.

Source: Scott Drenkard and Joseph Henchman, "2014 State Business Tax Climate Index," Tax Foundation, October 9, 2013.


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