State Business Tax Climate Index Ranks State Tax Systems on How Friendly They Are to Business

5/22/2003

From: Bill Ahern of The Tax Foundation, 202-464-5101 web: http://www.TaxFoundation.org

WASHINGTON, May 22 -- In a new study, The State Business Tax Climate Index, the Tax Foundation ranks the 50 states on how "business friendly" their tax systems were at the start of 2003. The full study online can be found at http://www.taxfoundation.org/businesstaxclimate.html

"Tax competition among states is an unpleasant reality for state revenue raisers," said Scott Hodge, Executive Director of the Tax Foundation and lead author of the new study, "but competition is a godsend to taxpayers. The most effective restraint on state taxes is the knowledge that business will take jobs and prosperity out of state if taxes become unmanageable."

States routinely assemble and publicize generous packages of tax abatements and public spending to lure large employers: baseball teams, auto plants or the corporate headquarters of a major firm. But under the media radar, each state's tax system is constantly competing with its neighbors for start-ups and business expansion without the benefit of special tax breaks. The State Business Tax Climate Index is designed to gauge which tax systems give their states a leg up in this competition.

Co-authored with Hodge by Tax Foundation Senior Economist Scott Moody, M.A., and Adjunct Scholar Wendy Warcholik, Ph.D., the study appears as Number 41 in the Foundation's Background Paper series.

The Best and Worst Business Tax Climates The ten states that began 2003 with the most business-friendly tax systems are Wyoming, New Hampshire, Nevada, Colorado, Alaska, South Dakota, Florida, Washington, Oregon and Tennessee. Of these ten, nine owe their high scores to their determination to dispense with at least one of the major taxes on sales, personal income or corporate income.

"The most effective way a state can compete for jobs and economic growth is to zero out one of the major taxes," said Hodge. "That gives a state a tremendous headstart in the race to grow its economy, saving business not only the tax payment but the administrative compliance burden."

Of the top ten, only Colorado levies all the common taxes, maintaining a very competitive business tax climate by keeping its taxes simple and lower than its neighbors.

The common characteristics of states that score poorly on the State Business Tax Climate Index are: complex, multi-rate corporate and individual tax codes that impose above-average tax rates at all levels of income; above-average sales tax rates that exempt few business input items; high overall state tax burdens and revenues that have grown faster than citizens' incomes; and tax codes that impose considerable compliance costs on businesses.

The ten states with the least hospitable business tax climates are Mississippi, California, Arkansas, Ohio, Nebraska, Hawaii, New York, Maine, Minnesota and Louisiana.

The State Business Tax Climate Index does not measure the general economic climate -- just the tax climate. While the index is comprehensive, it is not exhaustive. Future research into state taxation will lead to new variables and indexes to include in future editions of The State Business Tax Climate Index.

The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.