Alaska ranks 3rd in most business-friendly tax systems
October 14, 2004
"States do not enact tax changes in a vacuum," said Scott Hodge, president of the Tax Foundation and co-author of the study. "Every tax change will affect a state's competitive position relative to its neighbors, as well as globally."
The new study, "State Business Tax Climate Index," ranks the 50 states on how "business friendly" their tax systems are, providing a roadmap for state lawmakers concerned with keeping their states tax-competitive.
The goal of the index is to focus lawmakers on good-tax fundamentals in their states, rather than short-term tax abatements and exemptions designed to temporarily lure high- profile companies, baseball teams, and auto plants from other states.
"The temptation is for state lawmakers to lure high-profile companies with packages of tax bonuses," said Hodge, "but that strategy can backfire."
For example, in 2000 officials in Columbus, Ohio, lured a moving company with a 5-year package of tax goodies. In 2004, the company had not only failed to add 100 jobs as promised, but it had actually fired 98 employees, sending lawmakers into a panic to yank the final year of tax breaks.
"Ohio's experience shows preferential tax bonuses don't guarantee jobs will stay permanently," said 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."
Even states with excellent business tax climates trot out extra tax incentives. In 1996 Florida lawmakers lured a major credit card company to open a call center with a generous $4 million tax refund package. But earlier this year lawmakers were shocked at the announcement that the company was closing the Tampa call center and laying off 1,100 workers.
Best and Worst Tax Climates
Generally the index rewards tax codes that are neutral, have low and flat rates, are simple and transparent, avoid double taxation, and have statutory or constitutional restraints that keep tax burdens low over time. Table 1 ranks the 50 states. The ten states that began 2004 with the most business-friendly tax systems are: South Dakota, Florida, Alaska, Texas, New Hampshire, Nevada, Wyoming, Colorado, Washington and Oregon.
"Nearly all of the best states raise sufficient revenue without imposing at least one of the three major state taxes-sales taxes, personal income taxes and corporate income taxes," said Hodge. Four of the top 10 - Alaska, South Dakota, Washington and Wyoming - have only one of the three.
The ten states with the least hospitable business tax climates are: Hawaii, New York, Minnesota, West Virginia, Rhode Island, Vermont, Kentucky, Arkansas, Maine and Wisconsin.
The worst state tax codes tend to have:
"The ideal tax system, whether at the state, federal, or international level, should be neutral to business activity," said Hodge. "In such a system, people would base their economic decisions on the merits of the transactions rather than the tax implications."
How it Works
The methodology of the State Business Tax Climate Index is centered on the idea of economic neutrality. If a state's tax system maintains a "level playing field" for businesses, the index considers it neutral and ranks it highly. However, each state's final score depends on a comparison with the other 49 states.
The overall index is composed of five specific indexes devoted to major features of a state's tax system: the corporate income tax, the individual income tax, the sales or gross receipts tax, the unemployment insurance tax, and the state's fiscal balance. These five indexes are themselves composed of several sub-indexes. Overall, the index consists of 5 specific indexes, 10 sub-indexes, 33 categories and 109 variables.
Each state's laws and tax collections were assessed as of Jan. 1, 2004, and therefore reflect the business tax climate for the current year, but without consideration of 2004's legislative action. While the index is comprehensive, it is not exhaustive. Future research into state taxation will lead to new variables and sub-indexes in future editions of the index.
Best known for its annual calculation of Tax Freedom Day(r), the Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.
(Full study online at http://www.taxfoundation.org/sbtci.html on Oct. 14 at 9 a.m.)
State Business Tax Climate Index, 2004 (where 1 is the best tax climate)
Note: Tax laws and collections were assessed as of Jan. 1, 2004.
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