Economic Opportunity

Sizing Up State Business Tax Climates

December 1, 2015

Does your state have a business climate that fosters opportunity and economic growth for its residents? While many factors contribute to a dynamic business environment, the State Business Tax Climate Index, released each year by the Tax Foundation, ranks each state’s performance on taxation. In order to score high on the index, states must keep tax rates low enough to encourage business startups and help existing businesses thrive. They must also have a tax structure that minimizes corporate welfare and other forms of tax cronyism that provide special privileges to particular businesses at the expense of competitors and taxpayers.

As the index authors note, state lawmakers “are often tempted to lure business with lucrative tax incentives and subsidies … 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.”

To compile rankings, the Tax Foundation looks at over 100 variables—not only in state corporate taxes, but also in individual income taxes, sales taxes, property taxes, and unemployment insurance taxes—making the index a truly comprehensive assessment of each state’s tax system. While the number of business startups and the rate of job creation within new businesses remain significantly lower than prior to the 2008-09 recession, the index provides a critical measuring stick on how states can create a better tax climate to foster opportunity and economic growth.

The five states with the best tax climates for 2016 (ranked first through fifth) are Wyoming, South Dakota, Alaska, Florida, and Nevada, while the five worst states (ranked 46th through 50th) are Vermont, Minnesota, California, New York, and New Jersey. The Tax Foundation also highlights several noteworthy shifts in the rankings from last year. For example,  Illinois improved eight spots—going from 31st to 23rd—after 2011 corporate and individual income tax rate hikes expired; Nevada dropped from third to fifth overall after lawmakers added a modified gross receipts tax on many businesses; New Mexico rose from 37th to 35th, primarily for reducing its corporate tax rate from 7.3 to 6.9 percent; and North Carolina improved from 18th to 7th in the corporate tax component, as dramatic 2013 tax reforms, including rate reductions and tax code simplification, continue to phase in. North Carolina ranked as low as 44th overall as recently as 2014, before its historic reforms helped it rise to 15th overall the last two years.

To reduce barriers to opportunity, states should also consider reforms in criminal justice, education, occupational licensing, and other regulations. However, the Tax Foundation’s State Business Tax Climate Index reminds policymakers that tax policies remain a critical component in fostering opportunity.

The Charles Koch Foundation supports research on reducing barriers to opportunity, including research on cronyism, criminal justice and policing reform, innovation, and more. Learn more and submit your proposal.