The Tax Foundation, a nonpartisan tax research group based in Washington, D.C., released their State Business Tax Climate Index for 2020 in October 2019. It ranks the worst and the best states for business taxes, with Wyoming topping the list of the best and New Jersey in last place.
The ratings consider individual income taxes, major business taxes, sales taxes, unemployment taxes, and taxes on wealth or assets, such as property. The Index helps policymakers and business leaders compare their state's tax systems against others, and it reveals the states with the best-structured tax systems. It also shines a light on those that need to improve to attract more business.
The Tax Foundation quotes a 2018 Federal Reserve study indicating that employment in start-up firms drops by 3.7% for every 1% increase in a state's corporate tax rate.
The Most Tax-Friendly States for Business
The states that top the Tax Foundation list as the most tax-friendly:
1. Wyoming has no individual income tax, and it's one of only two states that don't levy a corporate income tax or a gross receipts tax.
2. South Dakota has no individual income tax, and this is the other state without a corporate income tax or gross receipts tax.
3. Alaska levies no individual income tax or state-level sales tax.
4. Florida has no individual income tax and it has a low unemployment insurance tax.
5. Montana's constitution limits its sales tax to 4%.
6. New Hampshire has no state-level sales tax.
7. Nevada has no corporate, franchise, or individual income tax.
8. Oregon doesn't have a sales tax, but it does have one of the highest individual income tax rates.
9. Utah ranks well for property taxes.
10. Indiana ranks among the best states for property tax rates.
Most of these top 10 states lack a major tax, although property taxes and unemployment insurance taxes are levied in every state. But a state can still rank in the top 10 even while levying all the major taxes.
Indiana and Utah levy all the major tax types, but the rates are low and the bases are broad.
Nevada imposes a gross receipt tax rather than a corporate income tax as of 2020, which is considered to have more of a negative economic impact than the corporate tax.
The Worst States for Business
The 10 least tax-friendly states for business:
41. Louisiana has a very high sales tax.
42. Iowa has a very high top corporate tax rate—12% as of 2020.
43. Maryland has a high individual income tax rate, and it's the only state with both an inheritance tax and an estate tax as of 2020. New Jersey used to share this dubious distinction but it's estate tax has been repealed.
44. Vermont has very high property taxes.
45. Minnesota has high individual and corporate tax rates. The top corporate rate is 9.8% as of 2020.
46. Arkansas is known for its high sales taxes.
47. Connecticut has some of the highest property taxes in the nation
48. California has the second highest individual income tax top rate in the nation.
49. New York has the third highest top individual income tax rate in the nation and it has pretty prohibitive property tax rates as well.
50. New Jersey has the highest top individual income tax rate in the U.S., and its corporate, sales, and property taxes are very high as well. The top corporate tax rate is 10.5% as of 2020.
New Jersey has some of the highest property tax burdens in the country and the second highest-rate corporate income tax as well. The state also levies an inheritance tax and has some of the nation’s worst-structured individual income taxes.
2018, 2019, and 2020 Changes
A temporary corporate income tax surcharge in Connecticut was reduced from 20% to 10% in 2018, dropping the top marginal rate to 8.25% from 9%. The 2018 rate reduction helped the state move up to 27th place on the corporate component of the Index, but Connecticut’s overall rank remains unchanged at 47th.
Arkansas legislators are working on comprehensive tax reform to overhaul individual and corporate income taxes including state-imposed property and wealth taxes. This marks the culmination of work by the state tax reform commission. If the state adopts a new plan, it is likely to change Arkansas' ranking in subsequent years.
New Jersey's corporate tax rate used to include a temporary surcharge which was in effect through 2019. The state's top tax rate at that time was 11.5%.