2017 State Business
Tax Climate Index
PRINCIPLED
INSIGHTFUL
ENGAGED
By Jared Walczak, Scott Drenkard, and Joseph Henchman
ISBN: 978-1-942768-12-8
© 2017 Tax Foundation
1325 G Street, NW, Suite 950
Washingtion, D.C. 20005
202.464.6200
taxfoundation.org
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Executive Summary
The Tax Foundation’s State Business Tax Climate Index enables business leaders, government
policymakers, and taxpayers to gauge how their states’ tax systems compare. While there are
many ways to show how much is collected in taxes by state governments, the Index is designed to
show how well states structure their tax systems, and provides a roadmap for improvement.
The 10 best states in this
year’s Index are:
1. Wyoming
2. South Dakota
3. Alaska
4. Florida
5. Nevada
6. Montana
7. New Hampshire
8. Indiana
9. Utah
10. Oregon
The 10 lowest ranked, or worst,
states in this year’s Index are:

41. Louisiana
42. Maryland
43. Connecticut
44. Rhode Island
45. Ohio
46. Minnesota
47. Vermont
48. California
49. New York
50. New Jersey
#27
MA
#44
RI
#43
CT
#50
NJ
#19
DE
#42
MD
(#47)
DC
#47
VT
#7
NH
2017 State Business Tax Climate Index
TAX FOUNDATION
Note: A rank of 1 is best, 50 is worst. Rankings do not average to the total.
States without a tax rank equally as 1. DC’s score and rank do not affect other
states. The report shows tax systems as of July 1, 2016 (the beginning of Fiscal
Year 2017).
Source: Tax Foundation.
10 Best Business Tax Climates
10 Worst Business Tax Climates
WI
#46
#39
#12
#8
#45
#24
#33
#11
#37
#36
#32
#34
#13
#38
#41
#14
#31
#35
#21
#3
#15
#23
#40
#25
#1
#2
#29
#6
#20
#10
#17
#22
#16
#9
#5
#48
#28
#4
#18
#49
#30
#26
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The absence of a major tax is a common factor among many of the top ten states. Property taxes
and unemployment insurance taxes are levied in every state, but there are several states that
do without one or more of the major taxes: the corporate income tax, the individual income tax,
or the sales tax. Wyoming, Nevada, and South Dakota have no corporate or individual income
tax (though Nevada imposes gross receipts taxes); Alaska has no individual income or state-level
sales tax; Florida has no individual income tax; and New Hampshire, Montana, and Oregon have
no sales tax.
This does not mean, however, that a state cannot rank in the top ten while still levying all the
major taxes. Indiana and Utah, for example, levy all of the major tax types, but do so with low
rates on broad bases.
The states in the bottom 10 tend to have a number of shortcomings in common: complex, non-
neutral taxes with comparatively high rates. New Jersey, for example, is hampered by some of the
highest property tax burdens in the country, is one of just two states to levy both an inheritance
tax and an estate tax, and maintains some of the worst-structured individual income taxes in the
country.
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Table 1.
2017 State Business Tax Climate Index Index Ranks and Component Tax Ranks
Overall
Rank
Corporate
Tax Rank
Individual
Income
Tax Rank
Sales
Tax Rank
Unemployment
Insurance
Tax Rank
Property
Tax Rank
Alabama
32
14
22
48
14
16
Alaska
3
27
1
5
29
22
Arizona
21
19
19
47
13
6
Arkansas
38
40
29
44
30
24
California
48
33
50
40
16
15
Colorado
16
18
16
39
42
14
Connecticut
43
32
37
27
21
49
Delaware
19
50
34
1
3
20
Florida
4
19
1
28
2
10
Georgia
36
10
42
33
35
21
Hawaii
26
11
31
23
24
17
Idaho
20
24
23
26
46
2
Illinois
23
26
10
35
38
46
Indiana
8
23
11
10
10
4
Iowa
40
47
33
21
34
40
Kansas
22
39
18
30
11
19
Kentucky
34
28
30
13
48
36
Louisiana
41
36
27
50
9
30
Maine
30
41
25
8
44
41
Maryland
42
21
46
14
26
42
Massachusetts
27
37
13
18
49
45
Michigan
12
8
14
9
47
25
Minnesota
46
43
45
25
28
33
Mississippi
28
12
20
38
5
35
Missouri
15
5
28
24
7
7
Montana
6
13
21
3
19
9
Nebraska
25
29
24
12
8
39
Nevada
5
34
1
41
43
8
New Hampshire
7
46
9
2
41
43
New Jersey
50
42
48
45
25
50
New Mexico
35
25
35
42
17
1
New York
49
7
49
43
32
47
North Carolina
11
4
15
19
6
31
North Dakota
29
16
36
34
15
3
Ohio
45
45
47
29
4
11
Oklahoma
31
9
38
36
1
12
Oregon
10
35
32
4
33
18
Pennsylvania
24
44
17
20
45
32
Rhode Island
44
31
39
22
50
44
South Carolina
37
15
41
31
37
26
South Dakota
2
1
1
32
40
23
Tennessee
13
22
8
46
23
29
Texas
14
49
6
37
12
37
Utah
9
3
12
17
22
5
Vermont
47
38
44
16
20
48
Virginia
33
6
40
11
39
28
Washington
17
48
6
49
18
27
West Virginia
18
17
26
15
27
13
Wisconsin
39
30
43
7
36
34
Wyoming
1
1
1
6
31
38
District of Columbia
47
31
43
33
27
47
Note: A rank of 1 is best, 50 is worst. Rankings do not average to the total. States without a tax rank equally as 1. D.C.’s
score and rank do not affect other states. The report shows tax systems as of July 1, 2016 (the beginning of Fiscal Year
2017).
Source: Tax Foundation.
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STATE BUSINESS TAX CLIMATE INDEX
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Arizona
Arizona is in the process of lowering its
corporate income tax rate. Scheduled
annual rate reductions began in 2015 and
will continue through 2018, with the rate
declining from 6.0 to 5.5 percent in 2016.
The first reduction helped the state improve
three places on the corporate income tax
component, and this year’s reduction moved
the state a further three places on the
corporate component, from 22nd to 19th, with
the state’s overall rank improving from 22nd to
21st. The cuts have been aided by limitations
on credits and other tax preferences, which
have helped pay down rate reductions.
Arkansas
Arkansas lowered its top marginal rate from
7 percent to 6.9 percent, but simultaneously
adopted new rate schedules, making it the only
state in which taxpayers at different income
levels pay under distinct rate schedules. This
income recapture provision offsets the modest
top marginal rate reduction, with the state���s
rank declining from 29th to 30th on the
individual income tax component.
Hawaii
The expiration of temporary tax increases in
Hawaii resulted in the elimination of the top
three individual income tax brackets and the
lowering of the top marginal rate from 11 to
8.25 percent. Although the income tax still
features an unusually numerous nine brackets,
these changes improved the state from 37th to
31st on the individual income tax component,
and from 30th to 27th overall.
Indiana
Last year, Indiana completed a four-year
phasedown of its corporate income tax rate
from 8.5 to 6.5 percent, the culmination of
legislation adopted in 2011. Subsequent
legislation enacted in 2014 established a
further schedule of rate reductions through
fiscal year 2022, when the corporate income
tax will drop to 4.9 percent. For 2017, the rate
declined from 6.5 to 6.25 percent, which, along
with the elimination of the state’s throwback
rule, bumped the state’s corporate component
rank from 24th to 23rd. The state ranks 8th
overall, an improvement from its rank of 10th
in 2016.
Louisiana
Buffeted by structural shortfalls and declining
revenue, Louisiana policymakers added a penny
to the state sales tax, increasing the state rate
from 4 to 5 percent while introducing greater
complexity to the sales tax base. With the
combined state and local rate now approaching
10 percent, Louisiana slipped from 48th to
50th on the sales tax component of the Index,
and declined from 36th to 41st overall.
Maine
Maine improved slightly (from 26th to 25th)
on the individual component of the Index as a
result of changes made to the state’s individual
income tax, adding a third bracket (which hurts
the state’s score) while lowering rates (which
improved the state’s score). Rates were cut
from 6.5 and 7.95 percent to three rates of 5.8,
6.75, and 7.15 percent.
Notable Ranking Changes in this Year’s Index
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Table 2.
State Business Tax Climate Index Index (2014–2017)
State
2014
Rank
2014
Score
2015
Rank
2015
Score
2016
Rank
2016
Score
2017
Rank
2017
Score
Change from 2016 to 2017
Rank
Score
Alabama
35
4.88
36
4.79
35
4.76
32
4.91
+3
+0.15
Alaska
4
7.27
4
7.27
3
7.38
3
7.29
0
-0.09
Arizona
22
5.18
24
5.13
22
5.19
21
5.21
+1
+0.02
Arkansas
38
4.72
40
4.61
41
4.50
38
4.60
+3
+0.10
California
48
3.78
48
3.76
48
3.76
48
3.76
0
0.00
Colorado
18
5.31
18
5.34
16
5.40
16
5.38
0
-0.02
Connecticut
43
4.48
43
4.45
43
4.35
43
4.34
0
-0.01
Delaware
15
5.49
15
5.45
14
5.52
19
5.32
-5
-0.20
Florida
5
6.85
5
6.84
4
6.89
4
6.86
0
-0.03
Georgia
37
4.72
38
4.70
39
4.61
36
4.68
+3
+0.07
Hawaii
32
4.93
32
4.93
30
4.93
26
5.13
+4
+0.20
Idaho
19
5.29
20
5.25
20
5.22
20
5.22
0
0.00
Illinois
28
4.98
31
4.94
23
5.18
23
5.21
0
+0.03
Indiana
10
5.82
10
5.80
10
5.81
8
5.96
+2
+0.15
Iowa
40
4.58
41
4.56
40
4.53
40
4.51
0
-0.02
Kansas
20
5.23
21
5.20
21
5.22
22
5.21
-1
-0.01
Kentucky
27
5.00
33
4.92
33
4.91
34
4.88
-1
-0.03
Louisiana
33
4.91
35
4.87
36
4.72
41
4.39
-5
-0.33
Maine
24
5.08
29
4.97
31
4.92
30
4.96
+1
+0.04
Maryland
42
4.48
42
4.48
42
4.40
42
4.36
0
-0.04
Massachusetts
23
5.17
25
5.12
25
5.15
27
5.13
-2
-0.02
Michigan
11
5.69
12
5.59
12
5.61
12
5.64
0
+0.03
Minnesota
47
4.18
47
4.16
46
4.19
46
4.19
0
0.00
Mississippi
21
5.22
22
5.18
26
5.13
28
5.13
-2
0.00
Missouri
13
5.52
16
5.44
17
5.39
15
5.45
+2
+0.06
Montana
6
6.36
6
6.33
6
6.31
6
6.27
0
-0.04
Nebraska
26
5.01
23
5.16
24
5.15
25
5.14
-1
-0.01
Nevada
3
7.45
3
7.43
5
6.45
5
6.46
0
+0.01
New Hampshire
7
6.13
7
6.09
7
6.14
7
6.11
0
-0.03
New Jersey
49
3.50
50
3.49
50
3.42
50
3.41
0
-0.01
New Mexico
34
4.90
34
4.87
34
4.88
35
4.85
-1
-0.03
New York
50
3.40
49
3.56
49
3.59
49
3.61
0
+0.02
North Carolina
41
4.52
11
5.60
11
5.67
11
5.73
0
+0.06
North Dakota
30
4.96
26
4.99
27
4.99
29
4.98
-2
-0.01
Ohio
44
4.24
44
4.25
45
4.23
45
4.27
0
+0.04
Oklahoma
31
4.93
28
4.97
32
4.92
31
4.95
+1
+0.03
Oregon
9
5.88
9
5.86
9
5.91
10
5.78
-1
-0.13
Pennsylvania
29
4.98
30
4.94
28
4.95
24
5.18
+4
+0.23
Rhode Island
46
4.22
45
4.20
44
4.33
44
4.30
0
-0.03
South Carolina
36
4.75
37
4.72
37
4.69
37
4.66
0
-0.03
South Dakota
2
7.56
2
7.55
2
7.47
2
7.49
0
+0.02
Tennessee
14
5.51
14
5.46
15
5.44
13
5.58
+2
+0.14
Texas
12
5.52
13
5.47
13
5.55
14
5.57
-1
+0.02
Utah
8
6.05
8
5.98
8
5.98
9
5.96
-1
-0.02
Vermont
45
4.22
46
4.19
47
4.17
47
4.13
0
-0.04
Virginia
25
5.01
27
4.99
29
4.94
33
4.90
-4
-0.04
Washington
16
5.41
17
5.37
18
5.38
17
5.38
+1
0.00
West Virginia
17
5.31
19
5.31
19
5.36
18
5.32
+1
-0.04
Wisconsin
39
4.63
39
4.67
38
4.63
39
4.57
-1
-0.06
Wyoming
1
7.78
1
7.79
1
7.76
1
7.76
0
0.00
District of Columbia
44
4.47
44
4.43
40
4.54
47
4.19
-7
-0.35
Note: A rank of 1 is best, 50 is worst. All scores are for fiscal years. D.C.'s score and rank do not affect other states.
Source: Tax Foundation.
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New York
Two years ago, New York policymakers enacted
a substantial corporate tax reform package
that continues to phase in, with this year’s
changes improving the state’s rank on the
corporate income tax component from 11th to
7th. This year, the state lowered its corporate
income tax rate from 7.1 to 6.5 percent and
reduced the capital stock tax rate from 0.15
to 0.125 percent. The capital stock tax is on a
path to repeal, which can be expected to yield
improvements on the property tax component
in future editions of the Index.
North Carolina
After the most dramatic improvement in
the Index’s history—from 41st to 11th in
one year—North Carolina has continued to
improve its tax structure, and now imposes
the lowest-rate corporate income tax in the
country at 4 percent, down from 5 percent
the previous year. This rate cut improves
the state from 6th to 4th on the corporate
income tax component, the second-best
ranking (after Utah) for any state that imposes
a major corporate tax. (Six states forego
corporate income taxes, but four of them
impose economically distortive gross receipts
taxes in their stead.) An individual income
tax reduction, from 5.75 to 5.499 percent, is
scheduled for 2017. At 11th overall, North
Carolina trails only Indiana and Utah among
states which do not forego any of the major
tax types.
Oklahoma
Oklahoma improved from 40th to 38th on
the individual component of the Index as the
individual income tax incorporated the first of
two scheduled rate reductions. The state is in
the process of lowering the income tax rate,
subject to revenue triggers, in two stages, from
5.25 to 4.85 percent. The state met its first-
year benchmark, resulting in a rate cut to 5.0
percent.
Pennsylvania
Pennsylvania’s capital stock tax, originally
slated for elimination in 2014, was fully phased
out in 2016, resulting in an improvement of
six ranks on the property tax component, from
38th to 32nd. In tandem with improvements
to the state’s previously worst-in-the-nation
unemployment insurance tax structure, the
elimination of the capital stock tax drove an
improvement from 28th to 24th overall.
South Dakota
Declining energy sector revenue drove a sales
tax rate increase in South Dakota, from 4.0
to 4.5 percent. The state’s rank on the sales
tax component of the Index fell from 27th to
32nd, though the state still ranks 2nd overall
by foregoing both individual and corporate
income taxes. While South Dakota’s sales tax
is still imposed at a low rate, its base includes a
wide range of business inputs.
Texas
The rate of the Texas gross receipts tax, called
the Margin Tax, fell from 0.95 to 0.75 percent
in 2016. This improvement affected the state’s
raw score on the corporate tax component, but
did not result in an improvement in component
rank. Texas fell slightly overall due to a relative
decline on property tax rank.
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District of Columbia
In 2014, the District of Columbia began
phasing in a tax reform package which lowered
individual income taxes for middle-income
brackets, expanded the sales tax base, and
raised the estate tax exemption. While last
year’s corporate income tax reductions
improved the District’s standing on the Index,
the new income tax brackets created in 2016
caused the District of Columbia to slip from
34th to 43rd on the individual income tax
component, as the changes included the
creation of an additional tax bracket and a
new top rate kick-in of $1 million, up from
$350,000. When changes to the corporate
income tax are fully phased in, the District of
Columbia is projected to improve from 31st to
25th on the corporate tax component of the
Index.
Recent and Proposed
Changes Not Reflected
in the 2017 Index
Indiana
While Indiana phased in a further reduction
of its corporate income tax this year, the final
scheduled reduction in the state’s individual
income tax rate, to 3.23 percent, is slated for
2017. The corporate income tax rate is also
scheduled to phase down to 4.9 percent.
Mississippi
In 2016, Mississippi adopted a gradual phase-
out of its capital stock tax, which will begin
in 2018 and fully repeal the tax by 2028. The
state will also begin phasing in a reduction
in its corporate and individual income tax
rates starting in 2018. These changes will be
reflected in subsequent editions of the Index.
Missouri
In 2015, Missouri policymakers passed an
income tax reduction that lowers the top
rate by 0.1 percent each year starting in
2017, dependent on a revenue trigger. These
changes will be reflected in the 2018 Index and
subsequent editions.
New Mexico
New Mexico continues to phase in corporate
income tax rate reductions, with the rate
scheduled to drop to 5.9 percent by 2018.
This year’s reduction, from 6.9 to 6.6 percent,
did not improve the state’s rank, but as the
rate continues to decline, these reforms will
enhance the state’s standing in comparison to
its neighbors and further improve its corporate
tax component score.
Tennessee
In 2016, Tennessee began phasing out its Hall
income tax, which is imposed on interest and
dividend income. The Index includes this tax at
a calculated rate to reflect its unusually narrow
base. The first-year rate reduction was too
small to change any component rankings, but
Tennessee’s rank will improve once the tax is
fully phased out in 2022.
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Introduction
Taxation is inevitable, but the specifics of a state’s tax structure matter greatly. The measure of
total taxes paid is relevant, but other elements of a state tax system can also enhance or harm
the competitiveness of a state’s business environment. The State Business Tax Climate Index
distills many complex considerations to an easy-to-understand ranking.
The modern market is characterized by mobile capital and labor, with all types of businesses,
small and large, tending to locate where they have the greatest competitive advantage. The
evidence shows that states with the best tax systems will be the most competitive at attracting
new businesses and most effective at generating economic and employment growth. It is true
that taxes are but one factor in business decision making. Other concerns also matter—such as
access to raw materials or infrastructure or a skilled labor pool—but a simple, sensible tax system
can positively impact business operations with regard to these resources. Furthermore, unlike
changes to a state’s health care, transportation, or education systems, which can take decades to
implement, changes to the tax code can quickly improve a state’s business climate.
It is important to remember that even in our global economy, states’ stiffest competition often
comes from other states. The Department of Labor reports that most mass job relocations are
from one U.S. state to another rather than to a foreign location.1 Certainly, job creation is rapid
overseas, as previously underdeveloped nations enter the world economy without facing the
third highest corporate tax rate in the world, as U.S. businesses do.2 State lawmakers are right
to be concerned about how their states rank in the global competition for jobs and capital, but
they need to be more concerned with companies moving from Detroit, Michigan, to Dayton,
Ohio, than from Detroit to New Delhi. This means that state lawmakers must be aware of how
their states’ business climates match up against their immediate neighbors and to other regional
competitor states.
Anecdotes about the impact of state tax systems on business investment are plentiful. In Illinois
early last decade, hundreds of millions of dollars of capital investments were delayed when
then-Governor Rod Blagojevich proposed a hefty gross receipts tax.3 Only when the legislature
resoundingly defeated the bill did the investment resume. In 2005, California-based Intel decided
to build a multibillion dollar chip-making facility in Arizona due to its favorable corporate income
tax system.4 In 2010, Northrup Grumman chose to move its headquarters to Virginia over
Maryland, citing the better business tax climate.5 In 2015, General Electric and Aetna threatened
to decamp from Connecticut if the governor signed a budget that would increase corporate tax
burdens, and General Electric actually did so.6 Anecdotes such as these reinforce what we know
from economic theory: taxes matter to businesses, and those places with the most competitive
tax systems will reap the benefits of business-friendly tax climates.
1 See, e.g., U.S. Department of Labor, Extended Mass Layoffs, First Quarter 2013 , Table 10, May 13, 2013.
2 Kyle Pomerleau, Corporate Income Tax Rates Around the World, 2014, Tax FoundaTion Fiscal FacT no. 436, Aug. 20, 2014.
3 Editorial, Scale it back, Governor, chicago Tribune, Mar. 23, 2007.
4 Ryan Randazzo, Edythe Jenson, and Mary Jo Pitzl, Chandler getting new $5 billion Intel facility, aZ cenTral, Mar. 6, 2013.
5 Dana Hedgpeth & Rosalind Helderman, Northrop Grumman decides to move headquarters to Northern Virginia, The WashingTon PosT, Apr.
27, 2010.
6 Susan Haigh, Connecticut House Speaker: Tax “mistakes” made in budget, associaTed Press, Nov. 5, 2015.
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Tax competition is an unpleasant reality for state revenue and budget officials, but it is an
effective restraint on state and local taxes. When a state imposes higher taxes than a neighboring
state, businesses will cross the border to some extent. Therefore, states with more competitive
tax systems score well in the Index, because they are best suited to generate economic growth.
State lawmakers are mindful of their states’ business tax climates, but they are sometimes
tempted to lure business with lucrative tax incentives and subsidies instead of broad-based
tax reform. This can be a dangerous proposition, as the example of Dell Computers and North
Carolina illustrates. North Carolina agreed to $240 million worth of incentives to lure Dell
to the state. Many of the incentives came in the form of tax credits from the state and local
governments. Unfortunately, Dell announced in 2009 that it would be closing the plant after only
four years of operations.7 A 2007 USA TODAY article chronicled similar problems other states
have had with companies that receive generous tax incentives.8
Lawmakers create these deals under the banner of job creation and economic development,
but the truth is that if a state needs to offer such packages, it is most likely covering for an
undesirable business tax climate. A far more effective approach is the systematic improvement of
the state’s business tax climate for the long term to improve the state’s competitiveness. When
assessing which changes to make, lawmakers need to remember two rules:
1. Taxes matter to business. Business taxes affect business decisions, job creation
and retention, plant location, competitiveness, the transparency of the tax
system, and the long-term health of a state’s economy. Most importantly, taxes
diminish profits. If taxes take a larger portion of profits, that cost is passed along
to either consumers (through higher prices), employees (through lower wages
or fewer jobs), or shareholders (through lower dividends or share value), or
some combination of the above. Thus, a state with lower tax costs will be more
attractive to business investment and more likely to experience economic growth.
2. States do not enact tax changes (increases or cuts) in a vacuum. Every tax law
will in some way change a state’s competitive position relative to its immediate
neighbors, its region, and even globally. Ultimately, it will affect the state’s
national standing as a place to live and to do business. Entrepreneurial states can
take advantage of the tax increases of their neighbors to lure businesses out of
high-tax states.
To some extent, tax-induced economic distortions are a fact of life, but policymakers should
strive to maximize the occasions when businesses and individuals are guided by business
principles and minimize those cases where economic decisions are influenced, micromanaged,
or even dictated by a tax system. The more riddled a tax system is with politically motivated
preferences, the less likely it is that business decisions will be made in response to market forces.
The Index rewards those states that minimize tax-induced economic distortions.
7
Austin Mondine, Dell cuts North Carolina plant despite $280m sweetener, The regisTer, Oct. 8, 2009.
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Dennis Cauchon, Business Incentives Lose Luster for States, usa TODAY, Aug. 22, 2007.
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Ranking the competitiveness of 50 very different tax systems presents many challenges,
especially when a state dispenses with a major tax entirely. Should Indiana’s tax system, which
includes three relatively neutral taxes on sales, individual income, and corporate income, be
considered more or less competitive than Alaska’s tax system, which includes a particularly
burdensome corporate income tax but no statewide tax on individual income or sales?
The Index deals with such questions by comparing the states on more than 100 variables in the
five major areas of taxation (corporate taxes, individual income taxes, sales taxes, unemployment
insurance taxes, and property taxes) and then adding the results to yield a final, overall ranking.
This approach rewards states on particularly strong aspects of their tax systems (or penalizes
them on particularly weak aspects), while also measuring the general competitiveness of their
overall tax systems. The result is a score that can be compared to other states’ scores. Ultimately,
both Alaska and Indiana score well.
Literature Review
Economists have not always agreed on how individuals and businesses react to taxes. As early as
1956, Charles Tiebout postulated that if citizens were faced with an array of communities that
offered different types or levels of public goods and services at different costs or tax levels, then
all citizens would choose the community that best satisfied their particular demands, revealing
their preferences by “voting with their feet.” Tiebout’s article is the seminal work on the topic of
how taxes affect the location decisions of taxpayers.
Tiebout suggested that citizens with high demands for public goods would concentrate
themselves in communities with high levels of public services and high taxes while those with
low demands would choose communities with low levels of public services and low taxes.
Competition among jurisdictions results in a variety of communities, each with residents who
value public services similarly.
However, businesses sort out the costs and benefits of taxes differently from individuals. For
businesses, which can be more mobile and must earn profits to justify their existence, taxes
reduce profitability. Theoretically, businesses could be expected to be more responsive than
individuals to the lure of low-tax jurisdictions. Research suggests that corporations engage in
“yardstick competition,” comparing the costs of government services across jurisdictions. Shleifer
(1985) first proposed comparing regulated franchises in order to determine efficiency. Salmon
(1987) extended Shleifer’s work to look at sub-national governments. Besley and Case (1995)
showed that “yardstick competition” affects voting behavior, and Bosch and Sole-Olle (2006)
further confirmed the results found by Besley and Case. Tax changes that are out of sync with
neighboring jurisdictions will impact voting behavior.
The economic literature over the past fifty years has slowly cohered around this hypothesis. Ladd
(1998) summarizes the post-World War II empirical tax research literature in an excellent survey
article, breaking it down into three distinct periods of differing ideas about taxation: (1) taxes
do not change behavior; (2) taxes may or may not change business behavior depending on the
circumstances; and (3) taxes definitely change behavior.
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Period one, with the exception of Tiebout, included the 1950s, 1960s, and 1970s and is
summarized succinctly in three survey articles: Due (1961), Oakland (1978), and Wasylenko
(1981). Due’s was a polemic against tax giveaways to businesses, and his analytical techniques
consisted of basic correlations, interview studies, and the examination of taxes relative to
other costs. He found no evidence to support the notion that taxes influence business location.
Oakland was skeptical of the assertion that tax differentials at the local level had no influence at
all. However, because econometric analysis was relatively unsophisticated at the time, he found
no significant articles to support his intuition. Wasylenko’s survey of the literature found some
of the first evidence indicating that taxes do influence business location decisions. However,
the statistical significance was lower than that of other factors such as labor supply and
agglomeration economies. Therefore, he dismissed taxes as a secondary factor at most.
Period two was a brief transition during the early- to mid-1980s. This was a time of great
ferment in tax policy as Congress passed major tax bills, including the so-called Reagan tax cut
in 1981 and a dramatic reform of the federal tax code in 1986. Articles revealing the economic
significance of tax policy proliferated and became more sophisticated. For example, Wasylenko
and McGuire (1985) extended the traditional business location literature to non-manufacturing
sectors and found, “Higher wages, utility prices, personal income tax rates, and an increase in the
overall level of taxation discourage employment growth in several industries.” However, Newman
and Sullivan (1988) still found a mixed bag in “their observation that significant tax effects [only]
emerged when models were carefully specified” (Ladd).
Ladd was writing in 1998, so her “period three” started in the late 1980s and continued up to
1998, when the quantity and quality of articles increased significantly. Articles that fit into period
three begin to surface as early as 1985, as Helms (1985) and Bartik (1985) put forth forceful
arguments based on empirical research that taxes guide business decisions. Helms concluded
that a state’s ability to attract, retain, and encourage business activity is significantly affected
by its pattern of taxation. Furthermore, tax increases significantly retard economic growth when
the revenue is used to fund transfer payments. Bartik concluded that the conventional view that
state and local taxes have little effect on business is false.
Papke and Papke (1986) found that tax differentials among locations may be an important
business location factor, concluding that consistently high business taxes can represent a
hindrance to the location of industry. Interestingly, they use the same type of after-tax model
used by Tannenwald (1996), who reaches a different conclusion.
Bartik (1989) provides strong evidence that taxes have a negative impact on business start-ups.
He finds specifically that property taxes, because they are paid regardless of profit, have the
strongest negative effect on business. Bartik’s econometric model also predicts tax elasticities
of –0.1 to –0.5 that imply a 10 percent cut in tax rates will increase business activity by 1 to
5 percent. Bartik’s findings, as well as those of Mark, McGuire, and Papke (2000), and ample
anecdotal evidence of the importance of property taxes, buttress the argument for inclusion of a
property index devoted to property-type taxes in the Index.
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By the early 1990s, the literature had expanded sufficiently for Bartik (1991) to identify fifty-
seven studies on which to base his literature survey. Ladd succinctly summarizes Bartik���s findings:
The large number of studies permitted Bartik to take a different approach from the
other authors. Instead of dwelling on the results and limitations of each individual
study, he looked at them in the aggregate and in groups. Although he acknowledged
potential criticisms of individual studies, he convincingly argued that some systematic
flaw would have to cut across all studies for the consensus results to be invalid. In
striking contrast to previous reviewers, he concluded that taxes have quite large and
significant effects on business activity.
Ladd’s “period three” surely continues to this day. Agostini and Tulayasathien (2001) examined
the effects of corporate income taxes on the location of foreign direct investment in U.S. states.
They determined that for “foreign investors, the corporate tax rate is the most relevant tax
in their investment decision.” Therefore, they found that foreign direct investment was quite
sensitive to states’ corporate tax rates.
Mark, McGuire, and Papke (2000) found that taxes are a statistically significant factor in private-
sector job growth. Specifically, they found that personal property taxes and sales taxes have
economically large negative effects on the annual growth of private employment.
Harden and Hoyt (2003) point to Phillips and Gross (1995) as another study contending that
taxes impact state economic growth, and they assert that the consensus among recent literature
is that state and local taxes negatively affect employment levels. Harden and Hoyt conclude
that the corporate income tax has the most significant negative impact on the rate of growth in
employment.
Gupta and Hofmann (2003) regressed capital expenditures against a variety of factors, including
weights of apportionment formulas, the number of tax incentives, and burden figures. Their
model covered fourteen years of data and determined that firms tend to locate property in states
where they are subject to lower income tax burdens. Furthermore, Gupta and Hofmann suggest
that throwback requirements are the most influential on the location of capital investment,
followed by apportionment weights and tax rates, and that investment-related incentives have
the least impact.
Other economists have found that taxes on specific products can produce behavioral results
similar to those that were found in these general studies. For example, Fleenor (1998) looked at
the effect of excise tax differentials between states on cross-border shopping and the smuggling
of cigarettes. Moody and Warcholik (2004) examined the cross-border effects of beer excises.
Their results, supported by the literature in both cases, showed significant cross-border shopping
and smuggling between low-tax states and high-tax states.
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Fleenor found that shopping areas sprouted in counties of low-tax states that shared a border
with a high-tax state, and that approximately 13.3 percent of the cigarettes consumed in the
United States during FY 1997 were procured via some type of cross-border activity. Similarly,
Moody and Warcholik found that in 2000, 19.9 million cases of beer, on net, moved from low- to
high-tax states. This amounted to some $40 million in sales and excise tax revenue lost in high-
tax states.
Although the literature has largely congealed around a general consensus that taxes are a
substantial factor in the decision-making process for businesses, disputes remain, and some
scholars are unconvinced.
Based on a substantial review of the literature on business climates and taxes, Wasylenko (1997)
concludes that taxes do not appear to have a substantial effect on economic activity among
states. However, his conclusion is premised on there being few significant differences in state
tax systems. He concedes that high-tax states will lose economic activity to average or low-
tax states “as long as the elasticity is negative and significantly different from zero.” Indeed,
he approvingly cites a State Policy Reports article that finds that the highest-tax states, such as
Minnesota, Wisconsin, and New York, have acknowledged that high taxes may be responsible for
the low rates of job creation in those states.9
Wasylenko’s rejoinder is that policymakers routinely overestimate the degree to which tax policy
affects business location decisions and that as a result of this misperception, they respond
readily to public pressure for jobs and economic growth by proposing lower taxes. According
to Wasylenko, other legislative actions are likely to accomplish more positive economic results
because in reality, taxes do not drive economic growth.
However, there is ample evidence that states compete for businesses using their tax systems.
A recent example comes from Illinois, where in early 2011 lawmakers passed two major tax
increases. The individual income tax rate increased from 3 percent to 5 percent, and the
corporate income tax rate rose from 7.3 percent to 9.5 percent.10 The result was that many
businesses threatened to leave the state, including some very high-profile Illinois companies
such as Sears and the Chicago Mercantile Exchange. By the end of the year, lawmakers had cut
deals with both firms, totaling $235 million over the next decade, to keep them from leaving the
state.11
9 sTaTe Policy rePorTs, Vol. 12, No. 11, Issue 1, p. 9, June 1994.
10 Both rate increases have a temporary component. After four years, the individual income tax will decrease to 3.75 percent. Then, in 2025,
the individual income tax rate will drop to 3.5 percent. The corporate tax will follow a similar schedule of rate decreases: in four years, the
rate will be 7.75 percent, and then, in 2025, it will go back to a rate of 7.3 percent.
11 Benjamin Yount, Tax increase, impact, dominate Illinois Capitol in 2011, illinois sTaTehouse neWs, Dec. 27, 2011.
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Measuring the Impact of Tax Differentials
Some recent contributions to the literature on state taxation criticize business and tax climate
studies in general.12 Authors of such studies contend that comparative reports like the State
Business Tax Climate Index do not take into account those factors which directly impact a state’s
business climate. However, a careful examination of these criticisms reveals that the authors
believe taxes are unimportant to businesses and therefore dismiss the studies as merely being
designed to advocate low taxes.
Peter Fisher’s Grading Places: What Do the Business Climate Rankings Really Tell Us?, now published
by Good Jobs First, criticizes four indices: The U.S. Business Policy Index published by the Small
Business and Entrepreneurship Council, Beacon Hill’s Competitiveness Report, the American
Legislative Exchange Council’s Rich States, Poor States, and this study. The first edition also
critiqued the Cato Institute’s Fiscal Policy Report Card and the Economic Freedom Index by the
Pacific Research Institute. In the report’s first edition, published before Fisher summarized his
objections: “The underlying problem with the … indexes, of course, is twofold: none of them
actually do a very good job of measuring what it is they claim to measure, and they do not, for
the most part, set out to measure the right things to begin with” (Fisher 2005). In the second
edition, he identified three overarching questions: (1) whether the indices included relevant
variables, and only relevant variables; (2) whether these variables measured what they purport
to measure; and (3) how the index combines these measures into a single index number (Fisher
2013). Fisher’s primary argument is that if the indexes did what they purported to do, then all
five would rank the states similarly.
Fisher’s conclusion holds little weight because the five indices serve such dissimilar purposes,
and each group has a different area of expertise. There is no reason to believe that the Tax
Foundation’s Index, which depends entirely on state tax laws, would rank the states in the same
or similar order as an index that includes crime rates, electricity costs, and health care (the Small
Business and Entrepreneurship Council’s Small Business Survival Index), or infant mortality rates
and the percentage of adults in the workforce (Beacon Hill’s State Competitiveness Report), or
charter schools, tort reform, and minimum wage laws (the Pacific Research Institute’s Economic
Freedom Index).
The Tax Foundation’s State Business Tax Climate Index is an indicator of which states’ tax systems
are the most hospitable to business and economic growth. The Index does not purport to
measure economic opportunity or freedom, or even the broad business climate, but rather the
narrower business tax climate, and its variables reflect this focus. We do so not only because the
Tax Foundation’s expertise is in taxes, but because every component of the Index is subject to
immediate change by state lawmakers.
12 A trend in tax literature throughout the 1990s was the increasing use of indices to measure a state’s general business climate. These
include the Center for Policy and Legal Studies’ Economic Freedom in America’s 50 States: A 1999 Analysis and the Beacon Hill Institute’s
State Competitiveness Report 2001. Such indexes even exist on the international level, including the Heritage Foundation and The Wall
Street Journal’s 2004 Index of Economic Freedom. Plaut and Pluta (1983) examined the use of business climate indices as explanatory
variables for business location movements. They found that such general indices do have a significant explanatory power, helping to
explain, for example, why businesses have moved from the Northeast and Midwest toward the South and Southwest. In turn, they also
found that high taxes have a negative effect on employment growth.
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It is by no means clear what the best course of action is for state lawmakers who want to thwart
crime, for example, either in the short or long term, but they can change their tax codes now.
Contrary to Fisher’s 1970s view that the effects of taxes are “small or non-existent,” our study
reflects strong evidence that business decisions are significantly impacted by tax considerations.
Although Fisher does not feel tax climates are important to states’ economic growth, other
authors contend the opposite. Bittlingmayer, Eathington, Hall, and Orazem (2005) find in their
analysis of several business climate studies that a state’s tax climate does affect its economic
growth rate and that several indices are able to predict growth. Specifically, they concluded,
“The State Business Tax Climate Index explains growth consistently.” This finding was confirmed
by Anderson (2006) in a study for the Michigan House of Representatives, and more recently
by Kolko, Neumark, and Mejia (2013), who, in an analysis of the ability of ten business climate
indices to predict economic growth, concluded that the State Business Tax Climate Index yields
“positive, sizable, and statistically significant estimates for every specification” they measured,
and specifically cited the Index as one of two business climate indices (out of ten) with
particularly strong and robust evidence of predictive power.
Bittlingmayer et al. also found that relative tax competitiveness matters, especially at the borders,
and therefore, indices that place a high premium on tax policies better explain growth. They
also observed that studies focused on a single topic do better at explaining economic growth at
borders. Lastly, the article concludes that the most important elements of the business climate
are tax and regulatory burdens on business (Bittlingmayer et al. 2005). These findings support
the argument that taxes impact business decisions and economic growth, and they support the
validity of the Index.
Fisher and Bittlingmayer et al. hold opposing views about the impact of taxes on economic
growth. Fisher finds support from Robert Tannenwald, formerly of the Boston Federal Reserve,
who argues that taxes are not as important to businesses as public expenditures. Tannenwald
compares 22 states by measuring the after-tax rate of return to cash flow of a new facility built
by a representative firm in each state. This very different approach attempts to compute the
marginal effective tax rate of a hypothetical firm and yields results that make taxes appear trivial.
The taxes paid by businesses should be a concern to everyone because they are ultimately borne
by individuals through lower wages, increased prices, and decreased shareholder value. States
do not institute tax policy in a vacuum. Every change to a state’s tax system makes its business
tax climate more or less competitive compared to other states and makes the state more or less
attractive to business. Ultimately, anecdotal and empirical evidence, along with the cohesion of
recent literature around the conclusion that taxes matter a great deal to business, show that the
Index is an important and useful tool for policymakers who want to make their states’ tax systems
welcoming to business.
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Methodology
The Tax Foundation’s State Business Tax Climate Index is a hierarchical structure built from five
components:

·
Individual Income Tax

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Sales Tax

·
Corporate Income Tax

·
Property Tax

·
Unemployment Insurance Tax
Using the economic literature as our guide, we designed these five components to score each
state’s business tax climate on a scale of 0 (worst) to 10 (best). Each component is devoted to
a major area of state taxation and includes numerous variables. Overall, there are 114 variables
measured in this report.
The five components are not weighted equally, as they are in some indices. Rather, each
component is weighted based on the variability of the fifty states’ scores from the mean. The
standard deviation of each component is calculated and a weight for each component is created
from that measure. The result is a heavier weighting of those components with greater variability.
The weighting of each of the five major components is:
32.6% — Individual Income Tax
22.7% — Sales Tax
19.7% — Corporate Tax
14.9% — Property Tax
10.1% — Unemployment Insurance Tax
This improves the explanatory power of the State Business Tax Climate Index as a whole, because
components with higher standard deviations are those areas of tax law where some states have
significant competitive advantages. Businesses that are comparing states for new or expanded
locations must give greater emphasis to tax climates when the differences are large. On the
other hand, components in which the 50 state scores are clustered together, closely distributed
around the mean, are those areas of tax law where businesses are more likely to de-emphasize
tax factors in their location decisions. For example, Delaware is known to have a significant
advantage in sales tax competition, because its tax rate of zero attracts businesses and shoppers
from all over the Mid-Atlantic region. That advantage and its drawing power increase every time
another state raises its sales tax.
In contrast with this variability in state sales tax rates, unemployment insurance tax systems
are similar around the nation, so a small change in one state’s law could change its component
ranking dramatically.
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Within each component are two equally weighted sub-indices devoted to measuring the impact
of the tax rates and the tax bases. Each sub-index is composed of one or more variables. There
are two types of variables: scalar variables and dummy variables. A scalar variable is one that
can have any value between 0 and 10. If a sub-index is composed only of scalar variables, then
they are weighted equally. A dummy variable is one that has only a value of 0 or 1. For example,
a state either indexes its brackets for inflation or does not. Mixing scalar and dummy variables
within a sub-index is problematic, because the extreme valuation of a dummy can overly
influence the results of the sub-index. To counter this effect, the Index generally weights scalar
variables 80 percent and dummy variables 20 percent.
Relative versus Absolute Indexing
The State Business Tax Climate Index is designed as a relative index rather than an absolute or
ideal index. In other words, each variable is ranked relative to the variable’s range in other states.
The relative scoring scale is from 0 to 10, with zero meaning not “worst possible” but rather
worst among the 50 states.
Many states’ tax rates are so close to each other that an absolute index would not provide
enough information about the differences among the states’ tax systems, especially for pragmatic
business owners who want to know which states have the best tax system in each region.
Comparing States without a Tax. One problem associated with a relative scale is that it is
mathematically impossible to compare states with a given tax to states that do not have the tax.
As a zero rate is the lowest possible rate and the most neutral base, since it creates the most
favorable tax climate for economic growth, those states with a zero rate on individual income,
corporate income, or sales gain an immense competitive advantage. Therefore, states without a
given tax generally receive a 10, and the Index measures all the other states against each other.
Two notable exceptions to this rule exist: the first is in Washington and Texas, which do not have
taxes on wage income but do apply their gross receipts taxes to limited liability corporations
(LLCs) and S corporations. Because these entities are generally taxed through the individual code,
these two states do not score perfectly in the individual income tax component. The second is in
zero sales tax states—Alaska, Delaware, Montana, New Hampshire, and Oregon—which do not
have general sales taxes but still do not score a perfect ten in that component section because of
excise taxes on gasoline, beer, spirits, and cigarettes, which are included in that section.
Normalizing Final Scores. Another problem with using a relative scale within the components
is that the average scores across the five components vary. This alters the value of not having
a given tax across major indices. For example, the unadjusted average score of the corporate
income tax component is 7.25 while the average score of the sales tax component is 5.41.
In order to solve this problem, scores on the five major components are “normalized,” which
brings the average score for all of them to 5.00, excluding states that do not have the given tax.
This is accomplished by multiplying each state’s score by a constant value.
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Once the scores are normalized, it is possible to compare states across indices. For example,
because of normalization, it is possible to say that Connecticut’s score of 4.87 on corporate
income taxes is better than its score of 4.71 on the sales tax.
Time Frame Measured by the Index (Snapshot Date)
Starting with the 2006 edition, the Index has measured each state’s business tax climate as it
stands at the beginning of the standard state fiscal year, July 1. Therefore, this edition is the
2017 Index and represents the tax climate of each state as of July 1, 2016, the first day of fiscal
year 2017 for most states.
District of Columbia
The District of Columbia (D.C.) is only included as an exhibit and its scores and “phantom ranks”
offered do not affect the scores or ranks of other states.
2017 Changes to Methodology
An economically neutral sales tax base includes all final retail sales of goods and services
purchased by the end users, while excluding all business inputs. The 2017 edition of the Index
updates our sales tax base methodology to reward states which broaden their sales tax bases to
include more final retail sales of goods and services, while continuing to penalize states to the
extent that they include business inputs in their base. States are also penalized for adopting sales
tax holidays, which increase compliance costs and temporarily narrow the tax base. Treatment of
business inputs continues to represent the bulk of the sales tax base sub-index.
Unlike corporate income taxes, which are imposed on the net income of corporations, gross
receipts taxes do not take corporate losses into account. In the past, the Index awarded ideal
scores on net operating loss (NOL) carrybacks and carryforwards to states which imposed gross
receipts taxes in lieu of corporate income taxes. To better capture the effect of gross receipts
taxes, which do not allow losses to be taken, carried back, or carried forward, the lack of NOLs in
these states is now reflected in the Index.
Finally, beginning with this edition, the Index relies upon calculated motor fuel tax rates from the
American Petroleum Institute, capturing states’ base excise taxes in addition to other gallonage-
based fees and ad valorem taxes placed upon gasoline. General sales tax rates that apply to
gasoline are included in this calculated rate, but states which include, or partially include, gasoline
in the sales tax base are rewarded in the sales tax breadth measure. All methodological change
has been backcast to previous years so that scores and ranks are comparable across time.
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Past Rankings & Scores
This report includes 2014, 2015, and 2016 Index rankings and scores that can be used for
comparison with the 2017 rankings and scores. These can differ from previously published
Index rankings and scores due to enactment of retroactive statutes, backcasting of the above
methodological changes, and corrections to variables brought to our attention since the last
report was published. The scores and rankings in this report are definitive.
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Corporate Tax
This component measures the impact of each state’s principal tax on business activities and
accounts for 19.7 percent of each state’s total score. It is well established that the extent of
business taxation can affect a business’s level of economic activity within a state. For example,
Newman (1982) found that differentials in state corporate income taxes were a major factor
influencing the movement of industry to southern states. Two decades later, with global
investment greatly expanded, Agostini and Tulayasathien (2001) determined that a state’s
corporate tax rate is the most relevant tax in the investment decisions of foreign investors.
Most states levy standard corporate income taxes on profit (gross receipts minus expenses).
Some states, however, problematically impose taxes on the gross receipts of businesses with
few or no deductions for expenses. Between 2005 and 2010, for example, Ohio phased in the
Commercial Activities Tax (CAT), which has a rate of 0.26 percent. Washington has the Business
and Occupation (B&O) Tax, which is a multi-rate tax (depending on industry) on the gross receipts
of Washington businesses. Delaware has a similar Manufacturers’ and Merchants’ License Tax,
as does Virginia with its locally-levied Business/Professional/Occupational License (BPOL) tax.
Texas also added the Margin Tax, a complicated gross receipts tax, in 2007, and Nevada adopted
the gross receipts-based multi-rate Commerce Tax in 2015. However, in 2011, Michigan passed
a significant corporate tax reform that eliminates the state’s modified gross receipts tax and
replaces it with a 6 percent corporate income tax, effective January 1, 2012.13 The previous tax
had been in place since 2007, and Michigan’s repeal followed others in Kentucky (2006) and New
Jersey (2006).
Since gross receipts taxes and corporate income taxes are levied on different bases, we
separately compare gross receipts taxes to each other, and corporate income taxes to each other,
in the Index.
For states with corporate income taxes, the corporate tax rate sub-index is calculated by
assessing three key areas: the top tax rate, the level of taxable income at which the top rate
kicks in, and the number of brackets. States that levy neither a corporate income tax nor a gross
receipts tax achieve a perfectly neutral system in regard to business income and thus receive a
perfect score.
States that do impose a corporate tax generally will score well if they have a low rate. States with
a high rate or a complex and multiple-rate system score poorly.
To calculate the parallel sub-index for the corporate tax base, three broad areas are assessed: tax
credits, treatment of net operating losses, and an “other” category that includes variables such as
conformity to the Internal Revenue Code, protections against double taxation, and the taxation
of “throwback” income, among others. States that score well on the corporate tax base sub-index
generally will have few business tax credits, generous carryback and carryforward provisions,
deductions for net operating losses, conformity to the Internal Revenue Code, and provisions
that alleviate double taxation.
13 See Mark Robyn, Michigan Implements Positive Corporate Tax Reform, Tax FoundaTion Tax Policy blog, Feb. 10, 2012.
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Table 3.
Corporate Tax Component of the State Business Tax Climate Index (2014–2017)
State
2014
Rank
2014
Score
2015
Rank
2015
Score
2016
Rank
2016
Score
2017
Rank
2017
Score
Change from 2016 to 2017
Rank
Score
Alabama
24
5.22
25
5.17
23
5.21
14
5.56
+9
+0.35
Alaska
26
5.11
27
5.05
28
5.01
27
5.01
+1
0.00
Arizona
23
5.27
23
5.33
21
5.40
19
5.45
+2
+0.05
Arkansas
37
4.75
37
4.71
39
4.67
40
4.61
-1
-0.06
California
30
4.94
32
4.89
34
4.85
33
4.84
+1
-0.01
Colorado
20
5.34
13
5.59
15
5.54
18
5.46
-3
-0.08
Connecticut
28
4.99
30
4.95
32
4.90
32
4.89
0
-0.01
Delaware
50
2.39
50
2.35
50
2.30
50
1.98
0
-0.32
Florida
13
5.61
14
5.56
16
5.51
19
5.45
-3
-0.06
Georgia
8
5.91
9
5.86
9
5.80
10
5.75
-1
-0.05
Hawaii
9
5.90
10
5.85
10
5.79
11
5.75
-1
-0.04
Idaho
18
5.40
22
5.35
22
5.30
24
5.27
-2
-0.03
Illinois
44
4.27
45
4.23
33
4.88
26
5.05
+7
+0.17
Indiana
29
4.98
28
5.05
24
5.41
23
5.29
+1
-0.12
Iowa
48
3.80
48
3.77
48
3.73
47
3.77
+1
+0.04
Kansas
36
4.76
36
4.72
38
4.67
39
4.63
-1
-0.04
Kentucky
25
5.12
26
5.08
27
5.03
28
4.97
-1
-0.06
Louisiana
17
5.41
21
5.37
36
4.80
36
4.78
0
-0.02
Maine
42
4.42
42
4.38
42
4.34
41
4.53
+1
+0.19
Maryland
15
5.56
16
5.51
18
5.46
21
5.44
-3
-0.02
Massachusetts
33
4.86
35
4.82
37
4.77
37
4.75
0
-0.02
Michigan
7
5.94
7
5.89
7
5.84
8
5.79
-1
-0.05
Minnesota
41
4.48
41
4.45
43
4.21
43
4.41
0
+0.20
Mississippi
10
5.81
11
5.75
12
5.70
12
5.63
0
-0.07
Missouri
4
6.14
4
6.08
3
6.03
5
5.98
-2
-0.05
Montana
16
5.55
17
5.51
19
5.45
13
5.61
+6
+0.16
Nebraska
35
4.83
29
5.01
29
4.97
29
4.94
0
-0.03
Nevada
1
10.00
1
10.00
26
5.09
34
4.80
-8
-0.29
New Hampshire
47
3.87
47
3.84
47
3.80
46
3.84
+1
+0.04
New Jersey
38
4.60
38
4.56
40
4.52
42
4.51
-2
-0.01
New Mexico
34
4.84
34
4.87
25
5.11
25
5.13
0
+0.02
New York
22
5.27
20
5.40
11
5.73
7
5.83
+4
+0.10
North Carolina
27
5.04
24
5.29
6
5.86
4
6.00
+2
+0.14
North Dakota
21
5.33
19
5.42
14
5.62
16
5.53
-2
-0.09
Ohio
45
4.09
44
4.34
45
4.00
45
3.94
0
-0.06
Oklahoma
11
5.74
8
5.89
8
5.83
9
5.78
-1
-0.05
Oregon
31
4.92
33
4.88
35
4.83
35
4.80
0
-0.03
Pennsylvania
43
4.39
43
4.35
44
4.11
44
4.31
0
+0.20
Rhode Island
39
4.58
39
4.54
31
4.95
31
4.91
0
-0.04
South Carolina
12
5.73
12
5.68
13
5.62
15
5.55
-2
-0.07
South Dakota
1
10.00
1
10.00
1
10.00
1
10.00
0
0.00
Tennessee
14
5.59
15
5.54
17
5.49
22
5.44
-5
-0.05
Texas
49
3.30
49
3.27
49
3.24
49
3.27
0
+0.03
Utah
5
6.08
5
6.03
4
5.97
3
6.07
+1
+0.10
Vermont
40
4.57
40
4.53
41
4.49
38
4.67
+3
+0.18
Virginia
6
5.99
6
5.94
5
5.89
6
5.83
-1
-0.06
Washington
46
4.01
46
3.96
46
3.91
48
3.76
-2
-0.15
West Virginia
19
5.38
18
5.45
20
5.40
17
5.52
+3
+0.12
Wisconsin
32
4.90
31
4.94
30
4.96
30
4.94
0
-0.02
Wyoming
1
10.00
1
10.00
1
10.00
1
10.00
0
0.00
District of Columbia
38
4.72
38
4.68
38
4.76
32
4.93
+6
+0.17
Note: A rank of 1 is best, 50 is worst. All scores are for fiscal years. D.C.'s score and rank do not affect other states.
Source: Tax Foundation.
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Corporate Tax Rate
The corporate tax rate sub-index is designed to gauge how a state’s corporate income tax top
marginal rate, bracket structure, and gross receipts rate affect its competitiveness compared to
other states, as the extent of taxation can affect a business’s level of economic activity within a
state (Newman 1982).
A state’s corporate tax is levied in addition to the federal corporate income tax, which varies in
rate from 15 percent on the first dollar of income to a top rate of 35 percent. This top rate is the
highest corporate income tax rate among industrialized nations. In many states, the federal and
state corporate tax rates combine to exceed corporate tax rates anywhere else in the world.14
On the other hand, there are two states that levy neither a corporate income tax nor a gross
receipts tax: South Dakota and Wyoming. These states automatically score a perfect 10 on this
sub-index. Therefore, this section ranks the remaining forty-eight states relative to each other.
Top Tax Rate. Iowa’s 12 percent corporate income tax rate qualifies for the worst ranking
among states that levy one, followed by Pennsylvania’s 9.99 percent rate. Other states with
comparatively high corporate income tax rates are Minnesota (9.8 percent), Alaska (9.4 percent),
Connecticut (9 percent), and New Jersey (9 percent). The District of Columbia imposes a top
corporate income tax rate of 9.4 percent. By contrast, North Carolina’s new rate of 4.0 percent is
the lowest nationally, followed by North Dakota’s at 4.31 percent and Colorado at 4.63 percent.
Other states with comparatively low top corporate tax rates are Mississippi, South Carolina, and
Utah (each at 5 percent).
Graduated Rate Structure. Two variables are used to assess the economic drag created by
multiple-rate corporate income tax systems: the income level at which the highest tax rate starts
to apply and the number of tax brackets. Twenty-eight states and the District of Columbia have
single-rate systems, and they score best. Single-rate systems are consistent with the sound
tax principles of simplicity and neutrality. In contrast to the individual income tax, there is no
meaningful “ability to pay” concept in corporate taxation. Jeffery Kwall, the Kathleen and Bernard
Beazley Professor of Law at Loyola University Chicago School of Law, notes that
graduated corporate rates are inequitable—that is, the size of a corporation bears no
necessary relation to the income levels of the owners. Indeed, low-income corporations
may be owned by individuals with high incomes, and high-income corporations may be
owned by individuals with low incomes.15
A single-rate system minimizes the incentive for firms to engage in expensive, counterproductive
tax planning to mitigate the damage of higher marginal tax rates that some states levy as taxable
income rises.
14 Kyle Pomerleau, Corporate Income Tax Rates around the World, 2015, Fiscal FacT no. 483, Tax Foundation, Oct. 1, 2015.
15 Jeffrey L. Kwall, The Repeal of Graduated Corporate Tax Rates, p. 1395, Tax noTes, June 27, 2011.
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The Top Bracket. This variable measures how soon a state’s tax system applies its highest
corporate income tax rate. The highest score is awarded to a single-rate system that has one
bracket that applies to the first dollar of taxable income. Next best is a two-bracket system
where the top rate kicks in at a low level of income, since the lower the top rate kicks in, the
more the system is like a flat tax. States with multiple brackets spread over a broad income
spectrum are given the worst score.
Number of Brackets. An income tax system creates changes in behavior when the taxpayer’s
income reaches the end of one tax rate bracket and moves into a higher bracket. At such a break
point, incentives change, and as a result, numerous rate changes are more economically harmful
than a single-rate structure. This variable is intended to measure the disincentive effect the
corporate income tax has on rising incomes. States that score the best on this variable are the 28
states—and the District of Columbia—that have a single-rate system. Alaska’s ten-bracket system
earns the worst score in this category. Other states with multi-bracket systems include Arkansas
(six brackets) and Louisiana (five brackets).
Corporate Tax Base
This sub-index measures the economic impact of each state’s definition of what should be
subject to corporate taxation.
The three criteria used to measure the competitiveness of each state’s corporate tax base are
given equal weight: the availability of certain credits, deduc