Just as words have meaning, taxes have economic ramifications. This annual blog on the Best State Tax Business Environments begins as it commenced and ended each of the past two years in the prior sentence .
Each state varies in one form or another in how much services their government provides and how those services are funded. 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.
As stated in the blog last year (slightly revised):
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, and family. When I was in graduate school, a valuable key course 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 (with the weighting of each noted below). The weighting differences were established as follows as stated in the Tax Foundation report:
“The five components are not weighted equally, as they are in some indices. Rather, each component is weighted based on the variability of the 50 states’ scores from the mean. The standard deviation of each component is calculated and a weight for each component is created from that measure. The result is a heavier weighting of those components with greater variability.”
- 30.1% — Individual Income Tax
- 25.3% — Sales Tax
- 19.5% — Corporate Tax
- 15.4% — Property Tax *
- 9.8% — Unemployment Insurance Tax
* Taxes on capital stock, intangible property, inventory, real estate transfers, estates, inheritance,
and gifts are included in the property tax component
The following states have the best state tax environments based on these five taxes and respective ratings
Just because a state has a great tax environment, however, does not necessarily always equate to a strong growing economy. The following table shows the job growth rates for each states in the 12-months ending August 2018. While Alaska has the 2nd best overall business tax environment, it ranks last in job growth in the prior 12 months. Some of the best tax environments, however, do have strong job growth rates. Five of the top-10 job growth rate states also rank in best five states based on the business tax climate.
As always, for every winner there a loser. The next table lists the bottom-10 states when it comes to taxes.
All 50 states are shown in the graphic with their respective 2019 rankings as provided by the Tax Foundation.
The following table lists each state along with the overall business tax climate rank by the Tax Foundation plus ranks across the 50 states for each of the five taxes. While the District of Columbia is included, it does not impact the rankings among the 50 states.
Individual states were referenced with notable state-specific tax changes included in this year’s rankings as follows
Connecticut – A temporary corporate income tax surcharge (that was originally set to expire in 2015) phased down from 20 to 10 percent in 2018 reducing the top marginal tax rate from 9.0 to 8.25 percent. Overall rank remains 47th best out of 50 states
Delaware – Delaware repealed a decade-old estate tax which had generated little revenue but drove many wealthy seniors to depart to the state, resulting in the overall rank rising from 16th to 11th best
Hawaii – restored higher tax rates and brackets which expired a year ago, with three tax brackets and a top marginal rate now of 11 percent, up from 8.25 percent. The state fell from 34th best overall to 38th, with the individual income tax rank going from 38th best to 47th
Idaho – Cuts in individual and corporate income taxes of 0.475 percent (with each tax falling from 7.40 percent to 6.925 percent) saw the state rise from 23rd best overall to 21st
Indiana – Prior legislation has corporate taxes reducing through 2022, with the rate falling from 6 to 5.75 percent in in 2018. The state does, however, collect on all five major tax categories
Kansas – Revenue shortfalls caused by tax cuts in 2012 instigated personal income tax increases in the past two years, adding an additional tax bracket and seeing the rate increase from 5.2 to 5.7 percent
Kentucky – Simplified taxes moving from a six-bracket individual income tax with a 6 percent top rate to a 5 percent single-rate tax. It eliminated a three-bracket corporate income tax and instigated a single rate, broadened the sales tax base, suspended numerous business tax credits and raised cigarette taxes. The state improved from 39th best to 23rd best due to these tax changes
New Jersey – Phased out estate tax in 2018, reduced sales tax rate from 6.875 percent to 6.625 percent (a two-year swap with higher gasoline taxes). A new individual income tax bracket was added with a 10.75 percent rate – the 3rd highest in the country. Also added was a corporate income tax surcharge on companies with $1 million or more income, increasing the rate to 11.5 percent. New Jersey remains the bottom-ranked state on taxes
Vermont — Set to gain from the federal tax reform, eliminated an individual income tax bracket and changed the top rate from 8.95 percent to 8.75 percent
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 rate to 8.25
No doubt there will be more changes in 2019. Alaska, for example, with no state corporate income tax, no state personal income tax, no state retail sales tax and no state government 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 five working drilling rigs and is down to 494,000 barrels per day total statewide production including offshore. The state’s proposed fiscal year 2019 capital budget is $150 million, down from almost $2 billion in fiscal year 2013. The deficit in 2019 under this proposed budget would be $2.5 billion. The Alaskan Permanent Fund has a $65.3 billion balance, with a $1,600 dividend in 2018 payment to Alaskans.
To view and download the 83-page report from the Tax Foundation click https://taxfoundation.org/state-business-tax-climate-index-2019/
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.