New York And New Jersey Have Least Business-Friendly State Taxes

by Mike Godfrey, Tax-News.com, Washington

01 March 2006

A new study by the Tax Foundation has found that the states of Wyoming, South Dakota and Alaska have the most "business-friendly" state tax systems in the United States, while New York, New Jersey and Rhode Island have the least hospitable tax systems.

The third edition of the Tax Foundation’s State Business Tax Climate Index, by Foundation economist Curtis S. Dubay and Scott A. Hodge, President of the Tax Foundation ranks the 50 states on how “business-friendly” their tax systems are.

Rounding out the top ten of the states with the most business-friendly tax systems are Florida, Nevada, New Hampshire, Texas, Delaware, Montana and Oregon.

Ohio, Vermont, Maine, Kentucky, Nebraska, Iowa and Arkansas complete the top ten worst state tax systems for businesses.

“Every one of the best tax systems raises sufficient revenue without imposing at least one of the three major state taxes — sales taxes, personal income taxes and corporate income taxes,” noted Mr Dubay.

“States do not enact tax changes in a vacuum,” added Mr Hodge.

“Every tax change will affect a state’s competitive position relative to its neighbors, as well as globally," he observed.

The Tax Foundation says that the goal of its study is to encourage state governments to bring about longer term reductions in the tax burdens that they place on businesses, rather than offer short term tax breaks to lure big employers.

“The temptation is for state lawmakers to lure high-profile companies with packages of tax bonuses,” said Hodge, “but that strategy can backfire.”

To illustrate the point, the Foundation points to the case of Ohio state officials, who in 2000 offered a company a five year package of tax breaks. However, the company not only failed to employ the 100 Ohio workers as promised, but actually fired 98 employees.

“Ohio’s experience shows preferential tax bonuses don’t guarantee jobs will stay permanently,” continued Hodge.

“Often they mask deeper flaws in state taxes. The Tax Foundation’s new State Business Tax Climate Index helps draw those to lawmakers’ attention," he added.

The Foundation explains that its index tends to rewards tax codes that are neutral and have low, flat tax rates that apply across the board. This makes tax law simpler and more transparent and avoids double taxation.

Typical characteristics of state tax codes falling near the bottom of the ranking include those with complex multi-rate corporate and individual income taxes; above-average sales tax rates that don’t exempt business-to-business purchases; complex, high-rate unemployment tax systems; and high effective property tax rates, as well as a host of other wealth-based taxes.

“The ideal tax system, whether at the state, federal, or international level, should be neutral to business activity,” said Dubay.

“In such a system, people would base their economic decisions on the merits of the transactions rather than the tax implications.”

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