This annual blog begins as it was ended last year: Just as words have meaning, taxes have economic ramifications.
Each state varies in one form or another in how they fund state government and also in how much government they fund. Big government requires big funding, and vice-versa. As usual, I invoke the TINSTAANREM axiom — There Is No Such Thing As A National Real Estate Market. Nor is there such a thing as equal sources for tax revenues for state governments.
Taxes, or lack thereof, can be an attraction or a turn-off to businesses relocating or expanding across the country. As an economist, for example, I would have an issue residing where there was a state income tax. Taxes are not the only reason why firms stay, move or expand elsewhere. There is a vast array of factors as to why businesses locate where they do: access to transportation, resources, skilled employees, markets. When I was in graduate school, a valuable course taken that specifically addressed this was named The Theory of the Firm in Economic Space. It was taught by Dr. Melvin Greenhut, a globally renowned economist in the study of why firms locate where they do. In modern terms and in addition to the previously mentioned factors plus taxes, other items of importance in Dr. Greenhut’s findings included:
- Jet Airline Service
- Interstate Highways
- Rail Service and Ports (for those businesses needing transportation access)
- And perhaps most importantly: It Had to be a Location Where the CEO Wanted to Live
How do the state’s compare when it comes to taxes? To answer this, each year the Tax Foundation, a non-profit based in Washington, D.C., ranks the tax friendliness of each state. This report is known as Tax Foundation’s State Business Tax Climate Index. They then rank each state based on five taxes (each with differing weights):
- Corporate Income Tax
- Personal Income Tax
- Retail Sales Tax
- Unemployment Tax
- Property Tax
The following states have the best state tax environments based on these five taxes. Just because a state has a great tax environment does not directly correlate to a strong, growing economy. Wyoming, for example, has major industry in energy — coal, oil and gas. All these today are materially cheap compared to just a few years ago. In addition to the ranking data from the Tax Foundation in the following table, also added is how the state voted in the 2016 presidential election. Seven of the top-10 were Red states and three of the top-10 Blue states.
As always, for every winner there a loser. The next table lists the bottom-10 states when it comes to taxes. Eight of the ten were Blue states in the 2016 presidential election and two were Red States.
All 50 states are shown in the graphic with their respective 2018 rankings as provided by the Tax Foundation.
Individual states referenced notable state-specific tax changes in the 2018 included in this study:
Arizona – completed a multi-year phase down of corporate income tax, dropping from 5.5 percent to 4.9 percent
California – in 2012 California passed Proposition 30 which temporarily raised the sales tax rate from 7.25 percent to 7.3 percent, and created four new income tax brackets with the peak marginal rate at 13.3 percent. In 2016 voters approved Proposition 55 with a 12-year continuation of the income tax provisions, but allowed the sales-tax increase to expire and revert back to 7.25 percent. Cigarette tax rocketed up from $0.87 per pack to $2.87. There was no change in rankings from 2017 to 2018
Illinois – Illinois legislature overrode the governor’s veto which included a single-rate state income tax increase for individuals from 3.75 percent to 4.95 percent and corporate rate increase from 7.75 percent to 9.5 percent. Pass-through entities (such as Sub-Chapter S Corporations) now pay a supplemental individual income tax of 11.5 percent, bringing the individual income tax rate for pass-through businesses to 6.45 percent. A similar tax increase was included in the state corporate income tax now 9.5 percent. These caused Illinois rankings to fall to 29th in 2018 from 23rd in 2017
Kansas – a 2012 tax cut package which eliminated all pass-throughs from taxation resulted in recurring revenue shortfalls for the state. Legislature created another tax bracket, and increased the maximum rate from 4.6 percent to 5.2 percent, overriding the governor’s veto. This dropped the state three ranks to 23rd today. Taxes today remain lower than in 2012
New Mexico – continues phasing in a state corporate tax rate cut, with 5.9 percent target in 2018 (last year shrinking from 6.6 percent to 6.2 percent). New Mexico’s overall rankings improved from 35th to 34th as a result
North Carolina – the state moved from 41st rank to 12th rank in 2015, the largest change ever posted by the Tax Foundation, and now has the lowest corporate tax rate (not all states have a corporate tax, however) in the country at 3 percent. The state remains ranked at 11th best in country for a second year in a row
Rhode Island – substantial cuts in unemployment taxes moved Rhode Island from 44th to 41st
District of Columbia – in 2014 D.C. commenced cutting personal tax rates in the middle class bracket, expanded the sales tax base and cut the corporate tax last year from 9.2 percent to 9.0 percent, but remained ranked at 47th
No doubt there will more changes in 2018. Alaska, for example, with no state corporate income tax, no state personal income tax, no state retail sales tax and has no participation in property taxes, bases their entire revenue source to run the state government on oil and gas production taxes and federal grants. Alaska today has just four working drilling rigs and is down to less than 500,000 barrels per day moving through the Alaskan pipeline, down from decades of 2.2 million barrels daily flow. The state’s 2017 budget deficit is projected to be $2.92 billion, and there is just $3.7 billion remaining in the Alaskan Constitutional Budget Reserve. While the Alaskan Permanent Fund has a $62.4 billion balance, the governor essentially garnished all but $1,000 for the 2017 payment to Alaskans.
To view and download the 83-page report from the Tax Foundation click https://taxfoundation.org/state-business-tax-climate-index-2018/
To find out more about the Tax Foundation and vast range of their research click http://taxfoundation.org/
As stated at the beginning of this blog: Just as words have meaning, taxes have ramifications.