Policymakers have the difficult task of generating adequate tax revenue without excessively hampering economic growth and employment. States can promote business in various ways, but the tax system is one of the key elements encouraging economic activity. According to The Tax Foundation, a think tank that advocates for lower taxes and a simpler tax code, some states remain much more tax friendly to business than others.

The Tax Foundation’s 2015 State Business Tax Climate Index graded all 50 states on more than 100 different measures to reflect the climate of the states’ tax structures to business. The states that, according to the group, have the best business tax climates generally have lower tax rates, including lower personal and corporate income taxes, and less complicated tax codes. Wyoming is the most tax-friendly state for business, while New Jersey was the least tax-friendly state.

 

Click here to see the most tax-friendly states for business

Click here to see the least tax-friendly states for business

While many may assume the corporate tax rate is the primary concern for companies, Scott Drenkard, economist and manager of state projects at The Tax Foundation, said, “The main lesson from this report is that businesses and individuals are very connected. When we work, we work at business, or we own businesses.” Further, for small businesses, which are frequently organized as LLCs, S corporations, and sole proprietors, taxes are levied through the individual income tax code rather than the corporate tax rate.

Several states don’t levy a major tax. For example, five states levy no general sales tax, including three of the most tax-friendly states. Seven states have no individual income tax, six of which are also among the most tax-friendly states. While nine of the most tax-friendly states don’t levy at least on major tax, the exception is Utah, which levies every kind of tax measured by the report but often at flat rates. Because The Tax Foundation considers flat rates more manageable, Utah still ranked among the most tax-friendly states

At least one major tax is completely absent in nine of the most tax-friendly states. For example, five states levy no general sales tax, including three of the most tax-friendly states. Seven states have no individual income tax, six of which are also among the most tax-friendly states. The exception is Utah, which levies every kind of tax measured by the report but often at flat rates. Because The Tax Foundation considers flat rates more manageable, Utah still ranked as the ninth most tax-friendly state.

High tax rates and the presence of certain kinds of taxes are not the only components that make a state’s tax system favorable for business. The structure of the a tax — whether there is a single or multi-bracket income tax system, for example — is also an important component. So, too, is the the breadth of the tax base, which can be the number of transactions, assets, or individuals on whom the tax is assessed. Drenkard explained that “if you have a narrow tax base it means your rates have to be higher on everyone else who isn’t getting tax carve outs.”

Not all tax experts agree that The Tax Foundation’s description of what makes a good business tax climate fairly reflects the attractiveness of a state for companies. Speaking to 24/7 Wall St., Matthew Gardener, executive director of the Institute on Taxation and Economic Policy, described fiscal policy as a two-sided coin. For fiscal policy, “the taxes we collect is on one side of the coin, but the public investments — the spending areas that taxes pay for — are on the other side.” Gardner asserted that The Tax Foundation’s approach considers only one side of the coin.

In fact, some of the states with favorable climates may offer residents fewer government benefits as a result of their low taxes. Gardner also added that states like Wyoming and Alaska have favorable tax climates for business because they can afford to do so. These states are able to raise huge sums of money through taxes on their large natural resources industries, and therefore do not need to collect as much tax revenue from incomes or sales.

According to figures from the Census Bureau’s 2013 Annual Survey of State Government Tax Collections report, 78.3% of all tax collections in Alaska were from severance taxes, or taxes on production of oil and other hydrocarbons. This is the highest percentage in the country. In Wyoming, that figure was 39.7%. By comparison, nationwide, less than 2% of all state tax collections came from such taxes.

Based on The Tax Foundation’s 2015 State Business Tax Climate Index, 24/7 Wall St. reviewed the 10 states with the best business tax environments and the 10 states with the worst business tax environments. Figures on various tax rates, bases, collections, and policies are from The Tax Foundation’s report. Unemployment rates are from the Bureau of Labor Statistics (BLS) and represent annual averages for 2013. Figures on GDP growth are from the Bureau of Economic Analysis and are also as of 2013

These are the most (and least) tax-friendly states.

The most tax-friendly states.

10. Texas
> State sales tax rate: 6.25% (12th highest)
> Property taxes collected per capita: $1,555 (15th highest)
> Unemployment rate: 6.3% (17th highest)
> Top income tax rate: N/A

Texas is the 10th most tax-friendly state for businesses. The Tax Foundation gave Texas a particularly strong score for its individual income tax policy, as Texas is one of just seven states without an individual income tax. While Texas does not tax income for individuals or businesses, it does tax have a gross receipts tax on business transactions. As a result, Texas was rated worse than a majority of states for its corporate taxing policies. Texas was also penalized for taxing intangible properties such as stocks, bonds, and even trademarks in one form or another.

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9. Utah
> State sales tax rate: 5.95% (25th lowest)
> Property taxes collected per capita: $912 (13th lowest)
> Unemployment rate: 4.4% (tied-4th lowest)
> Top income tax rate: 5.00%

While most tax-friendly states do not levy at least one major tax, Utah is one of only two of the most tax-friendly states that levies all major tax types. However, it does so at very low rates. Utah received high scores for both its corporate and property tax policies. The state collected just $912 in property taxes per resident in the most recent tax year, or 2.7% of personal income, both among the lower figures nationwide. And like all but one of the most tax-friendly states, Utah has no capital stock tax. Also like a number of the most tax-friendly states, Utah’s economy seems to be doing quite well. Just 4.4% of the state’s workforce was unemployed last year, versus a national unemployment rate of 7.4%, and lower than all but three other states.

8. Indiana
> State sales tax rate: 7.00% (tied-2nd highest)
> Property taxes collected per capita: $971 (15th lowest)
> Unemployment rate: 7.5% (17th highest)
> Top income tax rate: 3.40%

Of the five tax categories The Tax Foundation reviewed, Indiana’s lowest score was for its corporate tax system, but was still better than most states. As a result of recent legislation, however, the state’s corporate income tax rate is set to be reduced from 7.0% to 4.9% by 2021, which is expected to improve the state’s score considerably. Indiana had among the highest state sales tax rates, at 7%, but its excise taxes were lower than in most states. For example, beer was taxed at just 12 cents per gallon, lower than in all but a handful of states. While Indiana’s income tax policies scored relatively well, recent reforms will reduce the income tax rate from 3.4% to 3.3% as early as next year, which would improve its score even further.

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7. New Hampshire
> State sales tax rate: None
> Property taxes collected per capita: $2,518 (3rd highest)
> Unemployment rate: 5.3% (10th lowest)
> Top income tax rate: 5% (dividends & interest income)

With no general sales tax, New Hampshire scored better than all but one other state for its sales tax policy. The state ranked second in this category only because its excise taxes are relatively high. New Hampshire also levies no individual income tax on wages and salaries, although dividends and interest income are taxed. While everyday purchases and earnings are largely tax-free, New Hampshire received an exceptionally poor score for its corporate tax system. Unlike most states, New Hampshire caps the amount of tax carryforwards companies can deduct in the future if they run a net operating loss. Also, state property collections are relatively high. New Hampshire collected more than $2,500 in property taxes per resident, the third highest amount nationwide. This was also nearly 5.5% of a typical personal income in the state, higher than in all but one other state.

6. Montana
> State sales tax rate: None
> Property taxes collected per capita: $1,347 (24th highest)
> Unemployment rate: 5.6% (14th lowest)
> Top income tax rate: 6.9%

Montana is one of only five states with no state sales tax, which explains its third place rank for sales tax policy. However, the state’s excise taxes hurt its sales tax rating slightly. Spirits, for example, were taxed at $9.34 per gallon, higher than in all but two other states. Montana’s property and individual income tax systems were also rated among the best in the nation. Montana’s property tax base does not include intangible property, inventory, or real estate transfers, all of which can lower a state’s property tax policy ranking. Like a handful of states, Montana’s tax code does not feature a “marriage penalty.” This occurs when, according to The Tax Foundation, “when a state’s standard deduction and tax brackets for married taxpayers filing jointly are not double those for single filers.”

5. Florida
> State sales tax rate: 6.00% (tied-16th highest)
> Property taxes collected per capita: $1,369 (22nd highest)
> Unemployment rate: 7.2% (21st highest)
> Top income tax rate: N/A

The five most tax-friendly states, including Florida, received a perfect score for their individual income tax systems, as all of them have no income tax. Florida was ranked better than the vast majority of states for its sales tax policies as well. Despite this, its excise taxes are exceptionally high. Gasoline and diesel, for example, are both taxed at well more than 30 cents per gallon, among the highest rates nationwide. Florida and just seven other states were penalized for levying an alternative minimum tax (AMT) on corporations. While the tax was designed to ensure a minimum tax was paid by all businesses each year, the tax adds complexity and has been shown to be inefficient, according to The Tax Foundation. However, Florida was ranked nearly the best for unemployment insurance tax policy.

4. Alaska
> State sales tax rate: None
> Property taxes collected per capita: $2,077 (8th highest)
> Unemployment rate: 6.5% (18th lowest)
> Top income tax rate: N/A

Individual income is not taxed in Alaska. The state is also one of just a few with no state sales tax. Excise taxes on beer and spirits are among the nation’s highest, however, at $1.07 and $12.80 per gallon, respectively. Gasoline and diesel, on the other hand, are each only taxed at eight cents per gallon, lower than in every state except for Georgia. One reasons Alaska can levy such low taxes may be the role of the oil and gas industry. According to the Census Bureau, severance taxes — or taxes on the extraction of nonrenewable resources — accounted for more than 78% of the Alaska’s tax collections in 2013, by far the most of any state. Alaska is nearly the most tax-friendly state, but its economic output has floundered recently. The state’s GDP fell by an estimated 2.5% last year, the largest decrease in the nation.

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3. Nevada
> State sales tax rate: 6.85% (8th highest)
> Property taxes collected per capita: $1,109 (21st lowest)
> Unemployment rate: 9.8% (the highest)
> Top income tax rate: N/A

Like a majority of tax-friendly states, there is no individual income tax in Nevada. Some states make up for this lost revenue through taxes on corporations. Nevada, however, also has no corporate income tax, nor does it levy a gross receipts tax, one of only three states where neither tax is implemented. However, Nevada scored poorly for its sales tax policy, with a state sales tax rate of 6.85%, higher than in all but a handful of states. The state’s economy has also struggled to recover from the recession. The unemployment rate was 9.8% last year, considerably better than the year before, but still the highest nationwide.

2. South Dakota
> State sales tax rate: 4.00% (tied-7th lowest)
> Property taxes collected per capita: $1,196 (23rd lowest)
> Unemployment rate: 3.8% (2nd lowest)
> Top income tax rate: N/A

Like just a few other states, South Dakota does not levy a corporate income tax or a no gross receipts tax. Additionally, it is among the few states that does not tax income. The state’s excise taxes are moderately high across the board, however. The Tax Foundation also penalized South Dakota applyings its sales tax for many many business inputs. Ideally, the group notes, sales taxes would only be levied on finished products for sale, since otherwise a sale would effectively be taxed multiple times. The statewide sales tax of just 4%, however, was one of the lowest sales tax rates in the country. Although South Dakota did not receive a top score for its property tax system, residents paid only 2.7% of typical income on property taxes, one of the lower proportions nationwide.

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1. Wyoming
> State sales tax rate: 4.00% (tied-7th lowest)
> Property taxes collected per capita: $2,173 (6th highest)
> Unemployment rate: 4.6% (6th lowest)
> Top income tax rate: N/A

Wyoming is the most tax-friendly state for business in the nation, according to The Tax Foundation. The state received perfect scores for its corporate and individual income tax policies, and ranked relatively well for its sales tax policies. Wyoming is one of only three states that do not levy a corporate income or gross receipts tax. It is also among the seven states with no income tax. General sales were taxed at just 4% in Wyoming, and excise taxes were frequently among the nation’s lowest in the state. Beer, for example, is taxed at just 2 cents per gallon, among the lowest rates nationwide. Also, while liquor sales are state-controlled, spirits are sold at competitive prices, meaning there is no effective tax on such sales. Like a majority of tax-friendly states, the unemployment rate in Wyoming is particularly low, at just 4.6% last year, versus a national rate of 7.4%.

Click here to see the least tax-friendly states for business

The least tax-friendly states.

10. Iowa
> State sales tax rate: 6.00% (tied-16th highest)
> Property taxes collected per capita: $1,430 (18th highest)
> Unemployment rate: 4.6% (6th lowest)
> Top income tax rate: 8.98%

Iowa is the 10th least tax-friendly state for business, according to The Tax Foundation. Iowa scored second-lowest for corporate tax policies. This is largely because of the state’s top corporate income tax rate of 12%, which is the highest nationwide. Iowa was also one of just eight states levying an alternative minimum tax (AMT) on corporations. While the tax was designed to ensure corporations paid a minimum tax each year, the tax adds complexity and is considered to be inefficient by The Tax Foundation. Most states with multiple-bracket income tax codes ensure inflation is accounted for in determining tax brackets. Iowa’s system, however, is not indexed to inflation, one of only 16 states where peoples’ tax rates might increase due to inflation alone.

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9. Connecticut
> State sales tax rate: 6.35% (11th highest)
> Property taxes collected per capita: $2,580 (2nd highest)
> Unemployment rate: 7.8% (13th highest)
> Top income tax rate: 6.70%

Of the five categories reviewed by The Tax Foundation, Connecticut received its lowest score for property tax policies. The state collected nearly $2,600 in property taxes per resident in the most recent tax season, more than in all but one other state. Additionally, Connecticut was the only state to levy a gift tax. Gift taxes are often intended to prevent people from dodging the estate tax by giving their property away before they die. Connecticut also levies among the nation’s highest excise taxes. Diesel fuel, for example, is taxed at 55 cents per gallon, higher than in any other state. And cigarettes taxes add an additional $3.40 to the cost of a pack, the fourth highest such tax nationwide.

8. Wisconsin
> State sales tax rate: 5.00% (17th lowest)
> Property taxes collected per capita: $1,724 (12th highest)
> Unemployment rate: 6.7% (23rd lowest)
> Top income tax rate: 7.65%

While beer is taxed just at six cents per gallon in Wisconsin, nearly the lowest beer tax nationwide, other excise taxes are remarkably high compared to other states. Gasoline and diesel are taxed at 33 cents per gallon, among the highest figures nationwide. Also, like most of the least tax-friendly states, tobacco is highly taxed, at $2.52 per pack of cigarettes, the 10th highest surcharge in the country. While Wisconsin’s property tax policy was rated worse than most states, the state’s property tax rank improved from the previous year after it recently repealed its inventory tax on rental property.

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7. Ohio
> State sales tax rate: 5.75% (24th lowest)
> Property taxes collected per capita: $1,140 (22nd lowest)
> Unemployment rate: 7.4% (19th highest)
> Top income tax rate: 5.33%

In most states, corporate taxes are levied on profits. Ohio, however, has a gross receipts tax, which The Tax Foundation considers to be especially harmful for many businesses. As a result, Ohio scored third worst in the corporate tax category. Ohio also fared among the worst in the individual income tax category because of its relatively large number of tax brackets, and for temporarily suspending bracket indexing, which adjusts the bracket thresholds for inflation. Like most of the least tax-friendly states for business, excise taxes are particularly high in Ohio. Gasoline and diesel, for example, are each taxed at 28 cents per gallon, among the highest rates nationwide. While most of Ohio’s major tax policies scored very poorly, its unemployment insurance tax policies ranked better than all but four other states.

6. Rhode Island
> State sales tax rate: 7.00% (tied-2nd highest)
> Property taxes collected per capita: $2,161 (7th highest)
> Unemployment rate: 9.5% (2nd highest)
> Top income tax rate: 5.99%

Rhode Island residents each paid $2,161 in property taxes on average, or nearly 5% of a typical personal income, among the highest figures in the nation. The state’s general sales tax rate of 7% is also higher than in the vast majority of states. In addition to sales taxes, consumers have to pay additional high excise taxes on certain goods. Gasoline and diesel, for instance, are each taxed at 33 cents per gallon, among the highest rates nationwide. In addition, while beer is taxed at just 11 cents per gallon — one of the lower beer tax rates — cigarettes are taxed at $3.50 per pack, higher than in all but two other states. Like all of the least tax-friendly states, Rhode Island’s individual income tax system was rated worse than most. A reduction in the state’s corporate income tax from 9% to 7% will not take effect until January 1, 2015, and is not reflected in The Tax Foundation’s report.

5. Vermont
> State sales tax rate: 6.00% (tied-16th highest)
> Property taxes collected per capita: $2,197 (5th highest)
> Unemployment rate: 4.4% (tied-4th lowest)
> Top income tax rate: 8.95%

Vermont’s sales tax system scored better than most states. However, with sales tax-free New Hampshire just across the Connecticut River, there may be more at stake for Vermont businesses, as residents can easily cross the border to make purchases in New Hampshire. According to a recent Tax Foundation report, per capita sales among border businesses in New Hampshire roughly tripled since the late 1950s, while per capita sales remained stagnant in Vermont’s border counties. Property taxes in the state are also quite high. In the most recent tax season, Vermonters paid $2,197 on average in property taxes, or 5.3% of a typical personal income, both among the highest figures in the nation.

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4. Minnesota
> State sales tax rate: 6.88% (7th highest)
> Property taxes collected per capita: $1,535 (16th highest)
> Unemployment rate: 5.1% (9th lowest)
> Top income tax rate: 9.85%

Minnesota’s corporate and individual income tax policies are both rated among the worst in the nation. One reason is that Minnesota’s corporate income tax rate of 9.8% is higher than in any other state. Only Washington, D.C. has a higher corporate income tax rate. Minnesota is also penalized for being one of eight states with an alternative minimum tax on corporations. Although this assures companies pay a minimum amount in taxes each year, it does so by creating a parallel tax structure that generates little revenue and adds to tax complexity, The Tax Foundation argues.

3. California
> State sales tax rate: 7.50% (the highest)
> Property taxes collected per capita: $1,426 (19th highest)
> Unemployment rate: 8.9% (4th highest)
> Top income tax rate: 13.30%

California is one of the least tax-friendly states for business in part because of the its policies on individual income taxes. One major reason is that top-earning taxpayers can expect to pay as much as 13.3% of their annual income in state income taxes. This top tax rate affects residents earning $1 million or more. California also has a so-called “marriage penalty,” meaning that the standard deduction and tax bracket thresholds for a married couple filing a joint tax return are less than double what they would be if each spouse filed alone. California is also rated as one of the worst states for sales taxes. Its statewide sales tax rate of 7.5% is the highest in the nation.

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2. New York
> State sales tax rate: 4.00% (7th lowest)
> Property taxes collected per capita: $2,338 (4th highest)
> Unemployment rate: 7.7% (14th highest)
> Top income tax rate: 8.82%

New York’s corporate tax rank improved from a year ago due to the initial phasing-in of recent reforms. The rank is expected to continue to improve considerably after the reforms are fully implemented. Among the changes is the decline in the corporate tax rate from 7.1% to 6.5% once reforms are fully phased-in, and the elimination of the alternative minimum tax for businesses. However, New York still ranks as the second-worst state for individual income tax policy due to its high tax rates for top earners as well as for its income tax recapture provision. This provisions allows New York to “apply the rate of the top income tax bracket to previous taxable income after the taxpayer crosses the top bracket threshold,” according to The Tax Foundation noted, rather than just taxing each dollar earned above the threshold at the new rate.

1. New Jersey
> State sales tax rate: 7.00% (tied-f2nd highest)
> Property taxes collected per capita: $2,896 (the highest)
> Unemployment rate: 8.2% (8th highest)
> Top income tax rate: 8.97%

No state is less tax-friendly for business than New Jersey. The state collected nearly $3,000 per capita in property taxes, or 5.52% of a typical personal income, both the highest figures in the nation. New Jersey is also one of only two states with both an estate tax and an inheritance tax, which levies a tax on the heir of an estate in addition to taxing the estate itself. The Tax Foundation awarded states lower scores if they taxed multiple levels of the production process through a broad sales tax base. New Jersey is one of only a handful of states where sales on numerous business inputs — including utilities, services, and leases — are taxed. Additionally, while New Jersey’s excise taxes on fuel are among the nation’s lowest, the state’s general sales tax of 7% is nearly the highest. Like a majority of the least tax-friendly states, New Jersey’s economy is struggling somewhat, with an unemployment rate of 8.2% last year, versus the national rate of 7.4%.

Click here to see the most tax-friendly states for business

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