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Other states with multi-bracket systems include Arkansas and Maine and New Jersey . The Tax Foundation’s State Business Tax Climate Index is an indicator of which states’ tax systems are the most hospitable to business and economic growth. The Index does not purport to measure economic opportunity or freedom, or even the broad business climate, but rather the narrower business tax climate, and its variables reflect this focus. We do so not only because the Tax Foundation’s expertise is https://turbo-tax.org/ in taxes, but because every component of the Index is subject to immediate change by state lawmakers. It is by no means clear what the best course of action is for state lawmakers who want to thwart crime, for example, either in the short or long term, but they can change their tax codes now. Contrary to Fisher’s 1970s view that the effects of taxes are “small or non-existent,” our study reflects strong evidence that business decisions are significantly impacted by tax considerations.

Starting with the 2006 edition, the Index has measured each state’s business tax climate as it stands at the beginning of the standard state fiscal year, July 1. Therefore, this edition is the 2023 Index and represents the tax climate of each state as of July 1, 2022, the first day of fiscal year 2023 for most states. This does not mean, however, that a state cannot rank in the top 10 while still levying all the major taxes.

Notable rankings changes for Kansas, Oregon, and New Mexico

A gross receipts taxis a tax applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions 2021 State Business Tax Climate Index in addition to final consumer purchases, leading to tax pyramiding. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state/local taxes paid, mortgage interest, and charitable contributions.

To account for this, the Index converts the statutory tax rate into an effective rate as measured against the typical state income tax base that includes wages. Under a typical income tax base with a flat rate and no tax preferences, this is the statutory rate that would be required to raise the same amount of revenue as the current system. For New Hampshire, its 5 percent rate was multiplied by 19.6 percent, yielding the equivalent rate of 0.98 percent.

North Carolina Set to Become the Newest 0% Corporate Income Tax Rate State

States with the highest combined state and average local sales tax rates are Louisiana and Tennessee (both at 9.55 percent), Arkansas (9.47 percent), Washington (9.29 percent), and Alabama (9.24 percent). At the low end are Alaska (1.76 percent), Hawaii (4.44 percent), Wyoming (5.36 percent), Wisconsin (5.43 percent), and Maine (5.5 percent). Alabama and Louisiana have the highest average local option sales taxes (5.24 and 5.10 percent, respectively), and in both states the average local option sales tax is higher than the state sales tax rate. Other states with high local option sales taxes include Colorado (4.87 percent), New York (4.52 percent), and Oklahoma (4.49 percent).

• Corporations doing business in Colorado, as well as other states, must apportion to Colorado that part of their net income derived from sources within the state.
• That has been more than enough to make up for high taxes and poor rankings in the other 3 areas.
• This is a violation of tax neutrality since any decision by the employer or employee that would affect payroll may trigger higher UI tax rates.
• Taxes are paid by employers into the UI program to finance benefits for workers recently unemployed.
• South Carolina income the top rate from 7.0 to 6.5 percent while consolidating several brackets.
• That advantage and its drawing power increase every time another state raises its sales tax.
• The business must then collect sales tax on its own products, with the result that a tax is being charged on a price that already contains taxes.

Because these rates are so similar, if a state changes its unemployment tax rate, it could significantly affect its ranking. Pennsylvania, for example, made improvements to its UI taxes in 2021, cutting the rate and repealing a surtax to be more competitive, increasing its rank from 32nd to 29th overall. Each of the five components is a simple average of two sub-indexes, one related to tax rates and the other to the tax base.

Tax Policy & Competitiveness

Delaware, Idaho, Indiana, Ohio, Alaska, New Mexico, North Dakota, Nevada, New Hampshire, New Jersey, North Carolina, and Pennsylvania score the best because they each only levy one of the seven taxes. Connecticut, Maryland, and Kentucky receive the worst scores because they impose many of these taxes. Businesses remitted over $839 billion in state and local taxes in fiscal year 2020, of which $330 billion (39.2 percent) was for property taxes. The property taxes included tax on real, personal, and utility property owned by businesses (Phillips et al. 2021). Since property taxes can be a large burden on business, they can have a significant effect on location decisions.

While your state may not be the cheapest state to incorporate in, you may still find it more cost effective to incorporate there due to a variety of reasons. New Hampshire , will reduce the business profits tax to 7.6% from 7.7% percent and the business enterprise tax to 0.55% from 0.6 % for tax year 2022.