The Tax Foundation’s State Business Tax Climate Index measures the “tax-friendliness” to business of each state’s tax system. Tax systems are one of the principal tools that states use to compete for these jobs. The tax foundation has concluded that the special tax package game is often a futile approach for attracting businesses. States are better advised to keep taxes low and simple. It’s fair to existing business, it prevents boondoggles, and it works.
If any state imposes a greater overall tax burden than a neighboring state, business will cross the border to some extent. How much states take in taxes is critical, but how they take it can be just as important.
The most competitive tax systems are usually found in states that raise sufficient tax revenue without one of the major taxes on sales, personal income or corporate income.
The least competitive are found in states with complex, multi-rate corporate and individual tax codes; above-average sales tax rates that exempt few business-to-business transactions; high state tax collections; and few institutional restraints on taxation or spending.
The Tax Foundation asserts that as state lawmakers assess their tax systems, they should keep two rules in mind:
1. Taxes matter to business. Taxes affect business decisions, job creation and retention, plant location, competitiveness and the long-term health of a state’s economy. For businesses, taxes are an input cost, just like the cost of raw materials. When costs rise, they are passed along to consumers (through higher prices), workers (through lower wages or fewer jobs) and shareholders (through lower dividends or share value).
2. States do not enact tax increases or cuts in a vacuum. Every tax change will in some way change a state’s competitive position compared to states next door or across the country. Ultimately, it will affect the state’s national standing as a place to live and do business. Entrepreneurial states can take advantage of other states’ tax increases to lure businesses, which bring jobs and tax revenue.
The Tax Foundation’s overall index is a composite of five specific indexes devoted to major features of a state’s tax system that influence business decisions or the economy in general:
1. Corporate income tax
2. Individual income tax
3. Sales and gross receipts tax
4. Unemployment insurance tax
5. State’s fiscal balance
In total, the State Business Tax Index consists of five specific indexes, 10 sub-indexes and 109 variables. The accompanying table shows the raking by state and was compiled with 2004 data.
This article originally appeared in The Business Owner Journal, the periodical of choice for owners of small and midsize private businesses. All rights reserved, D.L. Perkins LLC. © 2012.
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