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Best and Worst State “Tax Environment” for Businesses

By | 10.23.12

Best and Worst State “Tax Environment” for Businesses

The Tax Foundation recently released the results of the 2013 State Business Tax Climate Index, which evaluates each state’s tax system and rates the best tax environment for businesses. Here is an overview of the top 3 best and worst.

Wyoming – Best

At #1, Wyoming outranked all its competitors on the Tax Climate Index, due primarily to business-friendly tax policies that are particularly helpful for small business owners. Wyoming has no income tax and no corporate tax. Although property taxes, at an effective rate of 4.81%, are some of the highest in the country, it has a relatively low sales tax – 4%. Unfortunately for Wyoming, its accommodating tax environment has not led to a massive relocation of businesses and corporations: according to the US Census Bureau, the number of firms in Wyoming has remained steady at about 15,000 since 2005.

South Dakota – #2

South Dakota ranked #2 in the study. Like Wyoming, South Dakota has no income tax, no corporate tax and only a 4% sales tax. Companies pay an effective rate on property taxes of only 2.86%. As to unemployment taxes, in general South Dakota is friendly to business owners, but the tax system can be confusing and depends on a range of factors which can in the end make payment of unemployment taxes considerably expensive.

Nevada – #3

With no income tax and no corporate tax, Nevada comes in at #3. Although property taxes in Nevada are low, with the effective rate at only 3.53%, the state’s sales tax rate is one of the highest in the nation: 6.85%. Businesses are enticed to Nevada by the promise of lower costs — the state keeps its maximum unemployment insurance rate at 5.4% — but employers are limited in the exemptions they can claim to avoid paying it.

Vermont – Third Worst

At the bottom end of the rankings, Vermont comes it at #48 with its very high income tax and its high corporate tax. There are five income brackets in Vermont, with the highest marginal rate of 8.95% for any income over $388,350. Businesses here pay the third highest rate of property taxes in the country: 5.27%. The sales tax is 6%. However, the state gets credit for its unemployment insurance policies that allow employers several exemptions and ensure that businesses in certain high-turnover industries don’t suffer crippling penalties.

New Jersey – Second Worst

New Jersey has high taxes in just about every category: very high income tax, high corporate tax, and very high sales tax. Although at #49 New Jersey has moved up one place since last year’s results, the study points out that New Jersey’s improved ranking is not due to a better tax environment but rather to the fact that its competitor for last place has gotten worse. The sales tax in New Jersey is 7%, the property tax rate is 5.34% and small businesses face six brackets on taxes with a top rate of 8.97% for income above $500,000.

New York – Worst

New York ranked #50 on the Tax Climate Index. New York business owners pay the highest individual income taxes in the country. They also pay the highest unemployment insurance and property taxes. While the corporate tax rate is a flat 7.1%, small business owners deal with eight different brackets ranging from 4% on any profit under $8,000 to 8.82% for income over $1 million. However, the sales tax of 4% is among the lowest in the nation.

Source: Jose Pagliery. “Taxes: Best and Worst StatesCNNMoney. Last updated October 15, 2012.

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