State and Local Taxes Official Website

Property taxes matter to businesses, and the tax rate on commercial property is often higher than the tax on comparable residential property. Additionally, many localities and states levy taxes on the personal property or equipment owned by a business. They can be on assets ranging from cars to machinery and equipment to office furniture and fixtures, but are separate from real property taxes, which are taxes on land and buildings. New Hampshire, which taxes individuals on interest and dividends, scores somewhat better because it does not tax capital gains.

This means that state lawmakers must be aware of how their states’ business climates match up against their immediate neighbors and to other regional competitor states. Washington experienced the worst slide in Index ranking this year, falling 13 places from 15th to 28th, primarily due to giving up its status as a state without an income tax. The state adopted a capital gains income tax on high earners which contains a sizeable marriage penalty and is not adjusted for inflation. Washington, with its unenviably aggressive gross receipts tax and high-rate sales tax, has always been buoyed on the Index by forgoing an income tax.

Kentucky

Arizona transitioned from a four-bracket individual income tax with a top rate of 4.5 percent to a two-bracket system with a top rate of 2.98 percent, a waypoint on the state’s transition to a 2.5 percent single-rate tax. Initially scheduled for 2024, robust revenue growth has led to the certification of the 2.5 percent rate for January 1, 2023, a significant development that will further improve Arizona’s ranking in next year’s Index. This year’s changes, however, were sufficient for Arizona to improve five places overall, from 24th to 19th. The Index annually demonstrates how competitive a state’s business tax climate is and informs the general reputation of a state as friendly or antagonistic to business.

• These taxes are levied on employers when a state’s unemployment fund falls below some defined level.
• In Iowa, a comprehensive tax reform package will see the state’s high graduated rate income tax transformed into a flat tax of 3.9 percent, with the corporate income tax declining to 5.5 percent, among other reforms.
• We have referred to the report issued by the Washington DC-based Tax Foundation to determine the rankings.
• Sometimes, the new investment will have to be “qualified” and approved by the state’s economic development office.
• The specter of having 50 different schedules would be a disaster from a tax complexity standpoint.

We improve lives through tax policy research and education that leads to greater economic growth and opportunity. The Alternative Minimum Tax (AMT) is a separate tax system that requires some taxpayers to calculate their tax liability twice—first, under ordinary income tax rules, then under the AMT—and pay whichever amount is highest. The AMT has fewer preferences and different exemptions and rates than https://turbo-tax.org/ the ordinary system. Tax pyramiding occurs when the same final good or service is taxed multiple times along the production process. This yields vastly different effective tax rates depending on the length of the supply chain and disproportionately harms low-margin firms. This method does not use benefit payments in the formula but instead the variation in an employer’s payroll from quarter to quarter.

Low cost of living

Since property taxes can be a large burden on business, they can have a significant effect on location decisions. A combined rate is computed by adding the general state rate to the weighted average of the county and municipal rates. The ideal base for sales taxation is all goods and services at the point of sale to the end-user. States with flat-rate systems score the best on this variable because their top rate kicks in at the first dollar of income (after accounting for the standard deduction and personal exemption). They are Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, New Hampshire, North Carolina, Pennsylvania, and Utah. These include New York ($25 million), New Jersey ($1 million of taxable income), California ($1 million), Connecticut ($500,000), and North Dakota ($445,000 of taxable income).

Historically, however, businesses have been required to depreciate the value of these purchases over time. The federal Alternative Minimum Tax (AMT) was created to ensure that all taxpayers paid some minimum level of taxes every year. Unfortunately, it does so by creating a parallel tax system to the standard corporate income tax code. Evidence shows that the AMT does not increase efficiency or improve fairness in any meaningful way. It nets little money for the government, imposes compliance costs that in some years are actually larger than collections, and encourages firms to cut back or shift their investments (Chorvat and Knoll, 2002). As such, states that have mimicked the federal AMT put themselves at a competitive disadvantage through needless tax complexity.

The Impact of 2022 State Business Tax Climate Rankings on Site Selection Strategies

Currently, New Hampshire is the only state that does not impose a tax on wage or salary income but does levy a tax on interest and dividend income. Beginning in tax year 2023, the state will phase out this interest and dividends tax by one percentage point per year until it is fully repealed by 2027. This year, the state reduced the Business Profits Tax (BPT) from 7.7 to 7.6 percent and the Business Enterprise Tax (BET, a value-added tax) from 0.6 to 0.55 percent, though these changes were insufficient to result in an improvement in the state’s rank. Kentucky has long competed with both Tennessee and Indiana for jobs and workers, though these two states have outpaced Kentucky in GDP growth and population growth.

• Using the economic literature as our guide, we designed these five components to score each state’s business tax climate on a scale of 0 (worst) to 10 (best).
• New York finished a phaseout of the state’s capital stock tax as of January 1, 2021, but the legislature decided to temporarily reinstate the tax due to coronavirus-related budget concerns.
• Georgia’s eight-year run as the top state for business comes to an end, but a second-place finish means it beat 48 other states in the ranking.
• This year’s changes, however, were sufficient for Arizona to improve five places overall, from 24th to 19th.
• Generally, these states have low minimum and maximum tax rates on each schedule and a wage base at or near the federal level.

But for many folks, there are real and tangible benefits of incorporation that make it worth the investment. “Some of that speaks to the fundamental advantages North Carolina had prior to the pandemic, which haven’t changed https://turbo-tax.org/2021-state-business-tax-climate-index/ during the pandemic,” says Chris Chung, CEO of the North Carolina Partnership of North Carolina. “Some of the areas that were booming before the pandemic, like some of the largest cities, perhaps took a step back.

“The Tax Foundation’s State Business Tax Climate Index enables business leaders, government policymakers, and taxpayers to gauge how their states’ tax systems compare. While there are many ways to show how much is collected in taxes by state governments, the Index is designed to show how well states structure their tax systems and provides a road map for improvement,” the report states in its executive summary. States that scored poorly have high tax rates and very progressive bracket structures writes Janelle Fritts, a Tax Foundation policy analyst. Minor improvement in corporate tax ranking was offset by minor decline in unemployment insurance tax ranking. To assist you in evaluating each state’s business tax climate, here are the results of a study performed by the Tax Foundation—a non-partisan tax research group based in Washington, D.C. According to the Tax Foundation’s 2021 State Business Tax Climate Index, here’s how all 50 states stack up to each other in terms of business friendliness.