State Business Tax Climate Index for 2023

The State Business Tax Climate Index from the Tax Foundation lets business leaders, officials in government, and taxpayers see how their states' tax systems compare to others. There are many ways to show how much a state government gets in taxes, but the Index is meant to show how well states set up their tax systems and offer suggestions for how to make them better.

The 10 best states in this year’s Index are:

1. Wyoming
2. South Dakota
3. Alaska
4. Florida
5. Montana
6. New Hampshire
7. Nevada
8. Utah
9. Indiana
10. North Carolina
Many of the top 10 states share the fact that they don't have a big tax. Every state has property taxes and taxes for unemployment insurance, but some states don't have any of the other big taxes, like the corporate income tax, the individual income tax, or the sales tax. Nevada, South Dakota, and Wyoming don't tax corporations or individuals on their income, but Nevada does tax gross earnings. Alaska doesn't tax individuals on their income or sales at the state level, and neither do Florida, New Hampshire, or Montana.

But this doesn't mean that a state can't be in the top 10 and still charge all the big taxes. Indiana and Utah, for example, collect all of the major types of taxes, but they do so with low rates and a wide range of bases.

The 10 lowest-ranked, or worst, states in this year’s Index are:

41. Alabama
42. Rhode Island
43. Hawaii
44. Vermont
45. Minnesota
46. Maryland
47. Connecticut
48. California
49. New York
50. New Jersey
The states in the bottom 10 tend to have a lot in common, like taxes that are hard to understand and have high rates. For example, New Jersey has some of the highest property taxes in the country. It also has the highest business income tax rate and one of the highest individual income tax rates. Also, the state treats foreign income in a very harsh way, has an inheritance tax, and has some of the worst-structured individual income taxes in the country.
2023 state business tax climate index 2023 state tax climate rankings 2023 state tax rankings
2023 State Business Tax Climate Index Ranks and Component Tax Ranks
State Overall Rank Corporate Tax Rank Individual Income Tax Rank Sales Tax Rank Property Tax Rank Unemployment Insurance Tax Rank
Alabama 41 18 30 50 18 19
Alaska 3 28 1 5 26 44
Arizona 19 23 16 41 11 14
Arkansas 40 29 37 45 27 20
California 48 46 49 47 19 24
Colorado 21 7 14 40 36 42
Connecticut 47 27 47 23 50 23
Delaware 16 50 44 2 4 2
Florida 4 10 1 21 12 3
Georgia 32 8 35 31 28 35
Hawaii 43 19 46 27 32 30
Idaho 15 26 19 10 3 47
Illinois 36 38 13 38 44 43
Indiana 9 11 15 19 2 27
Iowa 38 34 40 15 40 33
Kansas 25 21 22 25 17 15
Kentucky 18 15 18 14 24 48
Louisiana 39 32 25 48 23 6
Maine 35 35 23 8 47 38
Maryland 46 33 45 30 42 41
Massachusetts 34 36 11 13 46 50
Michigan 12 20 12 11 25 8
Minnesota 45 43 43 29 31 34
Mississippi 30 13 26 33 37 5
Missouri 11 3 21 26 7 4
Montana 5 22 24 3 21 18
Nebraska 29 30 32 9 39 11
Nevada 7 25 5 44 5 46
New Hampshire 6 44 9 1 43 45
New Jersey 50 48 48 42 45 32
New Mexico 22 12 36 35 1 9
New York 49 24 50 43 49 40
North Carolina 10 5 17 20 13 10
North Dakota 17 9 27 28 9 7
Ohio 37 39 41 36 6 13
Oklahoma 23 4 31 39 30 1
Oregon 24 49 42 4 20 36
Pennsylvania 33 42 20 16 16 22
Rhode Island 42 40 33 24 41 49
South Carolina 31 6 28 32 35 29
South Dakota 2 1 1 34 14 37
Tennessee 14 45 6 46 33 21
Texas 13 47 7 37 38 12
Utah 8 14 10 22 8 16
Vermont 44 41 39 17 48 17
Virginia 26 17 34 12 29 39
Washington 28 37 8 49 22 25
West Virginia 20 16 29 18 10 26
Wisconsin 27 31 38 7 15 31
Wyoming 1 1 1 6 34 28
District of Columbia 48 29 48 39 49 38

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, 2022 (the beginning of Fiscal Year 2023).
Source: Tax Foundation.


Notable Ranking Changes in this Year’s Index


Arizona transitioned from a four-bracket individual income tax with a top rate of 4.5 percent to a two-bracket system with a top rate of 2.98 percent, a waypoint on the state’s transition to a 2.5 percent single-rate tax. Initially scheduled for 2024, robust revenue growth has led to the certification of the 2.5 percent rate for January 1, 2023, a significant development that will further improve Arizona’s ranking in next year’s Index. This year’s changes, however, were sufficient for Arizona to improve five places overall, from 24th to 19th.


Like many other states, Arkansas cut the income tax rates for both corporations and individuals. In Arkansas, the top individual income tax rate went from 5.9 percent to 4.9 percent, and the business rate went from 6.2 percent to 5.9 percent. These changes took place for the 2022 tax year. The reduction in the business income tax rate also caused an existing bracket to be merged. The main reason the state moved from 43rd to 40th overall was because of these changes.


Under legislation adopted in 2022, Georgia will adopt a 5.49 percent flat-rate income tax in 2024 and ultimately phase that rate down to 4.99 percent. These changes, however, lie in the future, and for now, improvements in the tax policies of three other states—Mississippi, Nebraska, and South Carolina—saw Georgia slide three places by standing still.


Idaho improved two places overall, from 17th to 15th, due to the implementation of individual and corporate income tax rate reductions which took the individual income tax’s top rate, and the corporate income tax’s flat rate, from 6.5 to 6.0 percent. A ballot measure that would have created a new top rate of 10.925 percent to raise additional revenue for public education was taken off the ballot, and a deal was struck instead to provide additional education funding while implanting a 5.8 percent flat individual income tax rate in 2023. This change, which will be reflected in next year’s Index, will result in a further improvement in Idaho’s ranking.


The Bayou State made changes to its tax system that moved it from 42nd to 39th on the Index. The state's individual income tax component moved up nine places, and its business tax component and property tax component each moved up two places. Voters in November 2021 passed reforms that got rid of the deduction for federal taxes paid and replaced it with lower tax rates. The top rate of the individual income tax went from 6% to 4.25 %, and the top rate of the business income tax went from 8% to 7.5 %. Also, the rate of the capital stock tax was cut from 0.3% to 0.275 %, with the goal of eventually getting rid of it through tax triggers.


Legislative Bill 432, signed into law in 2021, reduced Nebraska’s top marginal corporate income tax rate from 7.81 percent to 7.5 percent on January 1, 2022, and will further reduce the rate to 7.25 percent in January 2023. Additional legislation (LB 873) enacted in 2022 will reduce the state’s top marginal individual income tax rate from 6.84 to 5.84 percent over five years, beginning in 2023. This year’s corporate tax reduction contributed to Nebraska improving one place overall, from 30th to 29th.

New Mexico

Alone among states, New Mexico used recent revenue growth to facilitate a state sales tax rate reduction, from 5.125 to 5.0 percent. New Mexico’s sales tax is a hybrid tax, which the state calls a gross receipts tax, with an overly broad base that includes more business-to-business transactions than most states’ sales taxes. Combined with a modest improvement in unemployment insurance taxes relative to changes in other states, this rate cut propelled New Mexico five places on the Index, from 27th to 22nd overall.


Oklahoma lowered its top marginal income tax rate from 5 to 4.75 percent, cut its business rate from 6 to 4 percent (tied for second lowest), and became the first state to make its full expensing policy permanent. Since Oklahoma already had full expensing, this policy doesn't affect the state's score yet. However, since federal bonus depreciation is set to decrease starting in 2023, if other states don't make changes, their pro-investment policies will become less generous while Oklahoma's will stay the same. Oklahoma moved from 28th to 23rd on the Index, which means that it got better.

South Carolina

South Carolina income the top rate from 7.0 to 6.5 percent while consolidating several brackets. The state has long had the highest top rate in the southeast, and while it maintains that distinction under this recent rate reduction, the gap between South Carolina and its neighbors has narrowed. The state improved two places on the Index, from 33rd to 31st, with further improvements anticipated in future years as the tax rate continues to phase down.


This year, Washington fell 13 places on the Index, from 15th to 28th. This was mostly because it stopped being a tax-free state and now has an income tax. The state put in place a capital gains income tax on high earners that is not updated for inflation and has a large marriage penalty. Washington has always done well on the Index because it doesn't have an income tax. Its strong gross receipts tax and high sales tax rates are not something to be proud of. When this unique thing was taken away, the state fell in our ranks.
Table 2. State Business Tax Climate Index (2014–2023)
  Prior Year Ranks 2022 2023 2022-2023 Change
State 2014 2015 2016 2017 2018 2019 2020 2021 Rank Score Rank Score Rank Score
Alabama 40 40 41 38 39 41 40 40 39 4.57 41 4.56 -2 -0.01
Alaska 4 4 3 3 3 3 3 3 3 7.25 3 7.23 0 -0.02
Arizona 27 26 23 24 24 23 22 23 24 5.10 19 5.26 5 0.16
Arkansas 41 42 45 42 43 46 44 46 43 4.50 40 4.57 3 0.07
California 48 48 48 48 49 48 48 48 48 3.58 48 3.56 0 -0.02
Colorado 23 22 21 21 20 18 20 19 20 5.23 21 5.17 -1 -0.06
Connecticut 47 47 47 47 47 47 47 47 47 4.10 47 4.08 0 -0.02
Delaware 18 15 15 22 22 14 15 16 16 5.33 16 5.32 0 -0.01
Florida 5 5 4 4 4 4 4 4 4 6.91 4 6.85 0 -0.06
Georgia 28 30 33 31 30 34 31 28 29 5.01 32 4.99 -3 -0.02
Hawaii 38 38 36 32 33 39 38 38 41 4.53 43 4.51 -2 -0.02
Idaho 15 18 18 18 18 20 19 20 17 5.28 15 5.33 2 0.05
Illinois 33 36 28 25 29 35 36 36 36 4.77 36 4.78 0 0.01
Indiana 10 10 10 9 9 10 10 9 9 5.64 9 5.63 0 -0.01
Iowa 45 45 46 46 46 45 45 42 38 4.67 38 4.66 0 -0.01
Kansas 22 24 26 27 28 31 34 33 23 5.14 25 5.13 -2 -0.01
Kentucky 35 35 34 37 37 19 18 17 18 5.27 18 5.27 0 0.00
Louisiana 32 33 38 45 45 42 43 41 42 4.50 39 4.62 3 0.12
Maine 30 34 35 36 35 28 29 32 34 4.96 35 4.90 -1 -0.06
Maryland 39 39 40 41 40 40 42 44 46 4.25 46 4.28 0 0.03
Massachusetts 26 28 27 28 25 30 35 35 35 4.93 34 4.95 1 0.02
Michigan 11 12 13 13 13 13 12 13 12 5.58 12 5.57 0 -0.01
Minnesota 46 46 44 44 44 44 46 45 45 4.37 45 4.35 0 -0.02
Mississippi 25 27 29 29 27 27 28 30 31 5.00 30 5.00 1 0.00
Missouri 14 16 19 15 15 15 14 11 11 5.60 11 5.59 0 -0.01
Montana 6 6 6 6 6 5 5 5 5 6.07 5 6.08 0 0.01
Nebraska 36 29 30 30 34 25 27 29 30 5.00 29 5.02 1 0.02
Nevada 3 3 5 5 5 6 7 7 6 5.94 7 5.93 -1 -0.01
New Hampshire 8 7 7 7 7 7 6 6 7 5.93 6 5.96 1 0.03
New Jersey 49 49 50 49 50 50 50 50 50 3.36 50 3.37 0 0.01
New Mexico 21 23 24 26 26 24 24 21 27 5.07 22 5.16 5 0.09
New York 50 50 49 50 48 49 49 49 49 3.50 49 3.45 0 -0.05
North Carolina 31 11 12 11 10 11 11 10 10 5.61 10 5.60 0 -0.01
North Dakota 19 19 17 17 17 16 17 18 19 5.26 17 5.29 2 0.03
Ohio 42 41 42 39 41 37 37 37 37 4.72 37 4.72 0 0.00
Oklahoma 20 21 22 20 21 26 26 25 28 5.06 23 5.15 5 0.09
Oregon 9 9 9 10 11 9 8 15 22 5.15 24 5.14 -2 -0.01
Pennsylvania 37 37 37 33 36 36 33 34 32 5.00 33 4.99 -1 -0.01
Rhode Island 44 43 39 40 38 38 39 39 40 4.54 42 4.54 -2 0.00
South Carolina 29 31 31 34 32 32 32 31 33 4.97 31 5.00 2 0.03
South Dakota 2 2 2 2 2 2 2 2 2 7.48 2 7.49 0 0.01
Tennessee 24 25 25 23 23 29 30 26 14 5.45 14 5.44 0 -0.01
Texas 12 13 11 12 12 12 13 12 13 5.55 13 5.51 0 -0.04
Utah 7 8 8 8 8 8 9 8 8 5.64 8 5.64 0 0.00
Vermont 43 44 43 43 42 43 41 43 44 4.47 44 4.44 0 -0.03
Virginia 16 17 20 19 19 21 23 24 25 5.09 26 5.07 -1 -0.02
Washington 13 14 14 14 14 17 16 14 15 5.38 28 5.03 -13 -0.35
West Virginia 17 20 16 16 16 22 21 22 21 5.18 20 5.21 1 0.03
Wisconsin 34 32 32 35 31 33 25 27 26 5.07 27 5.07 -1 0.00
Wyoming 1 1 1 1 1 1 1 1 1 7.77 1 7.76 0 -0.01
District of Columbia 47 48 47 48 48 47 47 48 48 3.86 48 3.75 0 -0.11

Note: A rank of 1 is best, 50 is worst. All scores are for fiscal years. DC’s score and rank do not affect other states.
Source: Tax Foundation.

Recent and Scheduled Changes Not Reflected in the 2023 Index


On January 1, 2024, Georgia will transition from a graduated individual income tax with a top rate of 5.75 percent to a flat tax structure with a rate of 5.49 percent. Per HB 1437, the rate could decrease to 4.99 percent by January 1, 2029, if certain revenue conditions are met, paired with substantial increases in personal exemptions.


The Hoosier State will cut its flat individual income tax rate from 3.23 to 3.15 percent in 2023. If subsequent triggers are met, the rate could be reduced to 2.9 percent by 2029.


In Iowa, a comprehensive tax reform package will change the state's high graduated income tax into a flat 3.9% tax and lower the business income tax to 5.5%, among other changes. In 2022, these changes won't happen, but in 2023, the income tax will be streamlined into four groups with a top marginal rate of 6%. In 2026, the tax will be a flat rate. These changes, which speed up and add to two previous rounds of tax reform, will make Iowa's score go up by a lot.


With the passage of HB 8, Kentucky will use revenue triggers to reduce its individual income tax by 0.5 percentage points in years in which the triggers are met. The use of these triggers could theoretically lead to the phaseout of the individual income tax in its entirety. However, even absent the elimination of the tax, rate reductions will bolster Kentucky’s score in future years.


Under HB 531, Mississippi will eliminate its current 4 percent individual income tax bracket on January 1, 2023. This will transition the state from a graduated income tax structure to a flat rate of 5 percent. The flat rate is scheduled to decrease to 4.7 percent in 2024, 4.4 percent in 2025, and finally 4 percent in 2026.


Montana made changes to its individual and business income tax structures in 2021. On January 1, 2022, the individual income tax rate went down by a small amount, but this wasn't enough to change the state's rank on the Index, especially since many other states made similar or bigger cuts. In 2024, however, the seven groups will be merged into two, and the top rate will be lowered to 6.5 percent. This is likely to lead to a better ranking change. Even though the lowest rate will go up to 4.7% in 2024, low-income people will save money on taxes if they switch to the federal standard deduction in 2025. This rule also makes the brackets for married people twice as wide. This gets rid of the marriage penalty in the state's income tax code.

New Hampshire

Currently, New Hampshire is the only state that does not impose a tax on wage or salary income but does levy a tax on interest and dividend income. Beginning in tax year 2023, the state will phase out this interest and dividends tax by one percentage point per year until it is fully repealed by 2027. This year, the state reduced the Business Profits Tax (BPT) from 7.7 to 7.6 percent and the Business Enterprise Tax (BET, a value-added tax) from 0.6 to 0.55 percent, though these changes were insufficient to result in an improvement in the state’s rank. The BPT will decline further, to 7.5 percent, in 2024.


Under legislation paired with the state budget, Pennsylvania will reduce the corporate net income tax rate from 9.99 percent to 8.99 percent on January 1, 2023. Each year thereafter the rate will decrease 0.5 percentage points until it reaches 4.99 percent at the beginning of 2031, transforming the nation’s second-highest corporate income tax rate into something much more competitive.


Taxes are a fact of life, but how a state collects its taxes is very important. The total amount of taxes paid is important, but there are other parts of a state's tax system that can also make or break a state's business setting. The State Business Tax Climate Index takes a lot of complicated factors and turns them into a simple score.

In the modern market, both capital and labor are mobile, and businesses of all sizes tend to set up shop where they can have the most competitive edge. The facts show that states with the best tax systems will be the most competitive when it comes to drawing new businesses and the most effective at growing the economy and jobs. It's true that taxes aren't the only thing that affects business decisions. Other things also matter, like having access to raw materials, infrastructure, or a pool of skilled workers, but a simple, reasonable tax system can help a business use these resources in a good way. Also, unlike changes to a state's health care, transportation, or education systems, which can take decades to implement, changes to the tax code can improve a state's business environment quickly.

Even though our economy is global, it is important to remember that states' toughest competition often comes from other states. The Department of Labor says that most people who move for work do so from one U.S. state to another, not to another country. As previously underdeveloped countries join the world economy, job growth is fast abroad. However, since the federal tax reform, U.S. businesses no longer have the third-highest corporate tax rate in the world. Instead, they have a tax rate that is similar to the average for industrialized countries. State lawmakers are right to worry about how their states rank in the global fight for jobs and capital, but they should worry more about companies moving from Detroit, Michigan, to Dayton, Ohio, than from Detroit to New Delhi, India. This means that state lawmakers need to know how their states' business climates compare to those of their neighbors and to those of other states in the same area.

There are a lot of stories about how state tax systems affect business spending. At the beginning of the last decade, when Rod Blagojevich was governor of Illinois, he suggested a high gross receipts tax. This stopped hundreds of millions of dollars of capital investments from happening. Only after the bill was soundly defeated by the lawmakers did the investment start up again. Intel, which is based in California, chose to build a multibillion-dollar chip factory in Arizona in 2005 because of the state's business tax system. Northrup Grumman moved its base from Maryland to Virginia in 2010. They did this because Virginia has better tax laws for businesses. In 2015, General Electric and Aetna said they would leave Connecticut if the governor passed a budget that raised taxes on corporations. General Electric followed through on its threat. These examples show what we already know from economic theory: taxes matter to businesses, and places with the most competitive tax systems will gain from a tax climate that is good for business.

State income and budget officials don't like having to deal with tax competition, but it does keep state and local taxes in check. When one state's taxes are higher than those of a nearby state, businesses will move to the neighboring state. So, states with tax systems that are more competitive do well in the Index because they are best able to grow their economies.

State officials are aware of how their states treat businesses when it comes to taxes, but they are sometimes tempted to use tax breaks and subsidies to bring in business instead of making broad changes to taxes. As the case of Dell Computers and North Carolina shows, this can be a risky thing to do. North Carolina decided to give Dell $240 million in incentives to move there. Many of the incentives came from the state and city governments in the form of tax credits. The plant had only been open for four years when Dell revealed in 2009 that it would be closing. In 2007, USA TODAY wrote about problems that other states have had with companies that get a lot of tax breaks.

Lawmakers make these deals under the guise of creating jobs and growing the economy, but the truth is that if a state needs to offer such deals, it's probably because it has a bad tax environment for businesses. Systematically improving the state's business tax situation over the long term is a much better way to make the state more competitive. Lawmakers need to remember two rules when deciding what changes to make:
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), 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. 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.
Some economic distortions are caused by taxes, but policymakers should try to make the most of the times when businesses and people are guided by business principles and the least of the times when a tax system influences, micromanages, or even dictates economic decisions. The more political choices there are in a tax system, the less likely it is that business decisions will be made based on what the market wants. The Index gives points to states that keep their economies from being messed up too much by taxes.

Ranking the competitiveness of 50 tax systems that are very different is hard, especially when a state gets rid of a big tax. Should Indiana's tax system, which has three fairly neutral taxes on sales, individual income, and corporate income, be seen as more or less competitive than Alaska's, which has a very high corporate income tax but no statewide taxes on individual income or sales?

The Index answers these kinds of questions by comparing the states on more than 120 variables in the five main areas of taxation (corporate taxes, individual income taxes, sales taxes, unemployment insurance taxes, and property taxes) and then adding the results to get a total, overall ranking. This method benefits states for parts of their tax systems that are especially good (or punishes them for parts that are especially bad), while measuring how competitive their tax systems as a whole are. This gives a score that can be compared to numbers from other states. In the end, Alaska and Indiana both do well.

Literature Review

Economists haven't always had the same ideas about how people and businesses respond to taxes. Charles Tiebout theorized as early as 1956 that if people had a choice of communities that offered different types or levels of public goods and services at different prices or tax levels, they would all choose the one that met their needs best. This is called "voting with their feet." Tiebout's paper is the most important piece of writing about how taxes affect where taxpayers choose to live.

Tiebout said that people who want a lot of public goods would live in places with lots of public services and high taxes, while people who don't want a lot of public goods would live in places with few public services and low taxes. Competition between governments has led to many different towns with people who all value public services in the same way.

But businesses and people look at the costs and rewards of taxes in different ways. Taxes make it harder for businesses to make money, which is bad because they need to make money to stay in business. Theoretically, low-tax jurisdictions could be more attractive to businesses than to people. Research shows that corporations participate in "yardstick competition," where they compare the prices of government services in different areas. Shleifer first suggested comparing controlled franchises in 1985 to figure out which ones were the most efficient. Salmon's work on subnational governments in 1987 added to what Shleifer had done. Besley and Case's study from 1995 showed that "yardstick competition" changes how people vote, and Bosch and Sole-Olle's study from 2006 added to what Besley and Case found. Changes to taxes that aren't in line with those in nearby areas will affect how people vote.

Over the past 50 years, the economics literature has slowly come together around this idea. In an excellent review article, Ladd (1998) breaks down the empirical tax research literature after World War II into three distinct periods with different ideas about taxation: (1) taxes don't change behavior, (2) taxes may or may not change business behavior, and (3) taxes do change behavior.

With the exception of Tiebout, period one was the 1950s, 1960s, and 1970s. Three survey pieces, Due (1961), Oakland (1978), and Wasylenko (1981), give a good overview of this time period. Due's was an argument against giving tax breaks to businesses. He did his analysis by looking at simple correlations, interview studies, and how taxes compare to other prices. He couldn't find any proof that taxes affect where a business is located. Oakland didn't believe that tax differences at the city level didn't make any difference. But because econometric analysis wasn't very advanced at the time, he couldn't find any important studies to back up his gut feeling. Wasylenko's review of the research found some of the first proof that taxes do affect where a business decides to set up shop. But in terms of statistical significance, it wasn't as important as other factors, like the quantity of workers and the benefits of living near other people. So, he thought taxes were at most a minor issue.

From the beginning to the middle of the 1980s, there was a short time of change. During this time, Congress passed a lot of important tax bills, like the so-called Reagan tax cut in 1981 and a big change to the federal tax code in 1986. There were more and better articles written about the economic importance of tax policy. Wasylenko and McGuire (1985) extended the traditional business location literature to non-manufacturing sectors and found that "higher wages, utility prices, personal income tax rates, and an increase in the overall level of taxation discourage employment growth in several industries." But Newman and Sullivan (1988) still found a mixed bag in "their observation that significant tax effects [only] emerged when models were carefully specified."

Ladd was still writing in 1998, so her "period three" went from the late 1980s to 1998. During this time, the number and quality of her works went up a lot. Articles that belong to period three start to appear as early as 1985, when Helms (1985) and Bartik (1985) use research to make strong claims that taxes affect how businesses make decisions. Helms came to the conclusion that a state's tax system has a big impact on its ability to attract, keep, and support business activity. Also, when the money from tax rises is used to pay for transfer payments, it slows economic growth by a lot. Bartik came to the conclusion that the common belief that state and local taxes don't affect businesses much is wrong.

Papke and Papke (1986) found that tax differences between places may be an important factor in deciding where to put a business. They came to the conclusion that regularly high business taxes can make it hard to put an industry in a certain place. They use the same type of after-tax model that Tannenwald (1996) did, but he came to a different result.

Bartik's research from 1989 shows that taxes hurt businesses that are just getting started. He finds that property taxes, which must be paid no matter how much money the company makes, hurt businesses the most. Bartik's econometric model also expects tax elasticities of -0.1 to -0.5, which means that a 10% cut in tax rates will make businesses do 1–5% more business. Bartik's results, as well as those of Mark, McGuire, and Papke (2000) and a lot of personal evidence about how important property taxes are, support the case for putting a property tax index in the Index.

By the early 1990s, there was enough new information that Bartik (1991) could find 57 works on which to base his review of the literature. Ladd gives a short summary of what Bartik found:

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" is still going on, for sure. Agostini and Tulayasathien looked at how corporate income taxes affect where foreign direct investment goes in U.S. states in 2001. They came to the conclusion that "for foreign investors, the corporate tax rate is the most important tax when deciding where to invest." So, they found that the tax rates on corporations in each state had a big effect on the amount of foreign direct investment.

Mark, McGuire, and Papke found in 2000 that taxes are a statistically important factor in the growth of jobs in the private sector. In particular, they found that taxes on personal property and taxes on sales hurt the annual growth of private jobs in a big way.

Phillips and Gross (1995) is another study that says taxes affect the economic growth of a state. Harden and Hoyt (2003) say that most recent studies agree that state and local taxes hurt job levels. Harden and Hoyt come to the conclusion that the corporate income tax is the thing that hurts the rate of job growth the most.

Gupta and Hofmann (2003) regressed capital spending against a number of factors, such as the weights of apportionment formulas, the number of tax incentives, and burden figures. Their model looked at data from 14 years and found that companies tend to put their property in states with lower income tax rates. Also, Gupta and Hofmann say that throwback requirements have the most effect on where capital investments are made, followed by apportionment weights and tax rates. Investment-related incentives, on the other hand, have the least impact.

Other economists have found that taxes on certain goods can cause people to act in ways that are similar to what these general studies found. For example, Fleenor (1998) looked at how different state excise taxes affect shopping across state lines and sneaking cigarettes. Moody and Warcholik (2004) looked at the impact of beer taxes across borders. In both cases, the literature backs up their findings that there is a lot of shopping and moving across state lines between states with low taxes and states with high taxes.

Fleenor found that shopping areas grew up in counties of low-tax states that shared a border with a high-tax state. He also found that about 13.3% of the cigarettes used in the U.S. in FY 1997 were bought through some kind of activity that took place across the border. Moody and Warcholik also found that in 2000, 19.9 million cases of beer went from states with low taxes to states with high taxes. This meant that high-tax states lost about $40 million in sales and income tax money.

Even though most of the research agrees that taxes are a big part of how businesses decide what to do, there are still some disagreements, and some scholars are still not sure.

Wasylenko (1997) came to this conclusion after looking at a lot of research on business conditions and taxes. He found that taxes don't seem to have a big effect on how much business is done in each state. But his conclusion is based on the idea that state tax systems are not very different from each other. He agrees that states with high taxes will lose economic activity to states with medium or low taxes "as long as the elasticity is negative and significantly different from zero." In fact, he cites with approval a State Policy Reports piece that says the states with the highest taxes, such as Minnesota, Wisconsin, and New York, have admitted that high taxes may be why they don't create many jobs.

Wasylenko's response is that policymakers often overestimate how much tax policy affects business location choices. Because of this mistaken belief, they are quick to propose lower taxes when the public wants more jobs and economic growth. Wasylenko says that other legislative acts are more likely to have a bigger impact on the economy than taxes, since taxes don't really drive economic growth.

But there is a lot of proof that states use their tax systems to compete for businesses. A recent example comes from Illinois, where politicians passed two big tax hikes at the beginning of 2011. The income tax rate for individuals went from 3% to 5%, and the rate for corporations went from 7.3 to 9.5 percent. As a result, many businesses, including some very well-known ones like Sears and the Chicago Mercantile Exchange, said they might leave the state. By the end of the year, officials had made deals with both companies that would pay them a total of $235 million over the next ten years to stay in the state.

Kleven et al. (2019) wrote a new review of the literature that looks at recent proof for tax-driven migration. Giroud and Rauh (2019) use microdata on multistate firms to figure out how state taxes affect business activity. They find that C corporation employment and establishments have short-run corporate tax elasticities of -0.4 to -0.5, while pass-through entities have short-run corporate tax elasticities of -0.2 to -0.4. This means that for every percentage-point increase in the rate, C corporation employment goes down by 0.4 to 0.5 percent, and for pass-through entities, employment goes down by 0.2

Measuring the Impact of Tax Differentials

Some of the most recent papers on state taxation have been critical of business and tax environment studies in general. The people who write these kinds of studies say that comparisons like the State Business Tax environment Index don't take into account the things that directly affect a state's business environment. But if you look closely at these complaints, you can see that the people who wrote them don't think taxes are important for businesses. Because of this, they dismiss the studies as just being made to support low taxes.

What Do the Business Climate Rankings Really Tell Us?, by Peter Fisher, is a book about how to grade places. The U.S. Business Policy Index from the Small Business and Entrepreneurship Council, Beacon Hill's Competitiveness Report, the American Legislative Exchange Council's Rich States, Poor States, and this study are all criticized in a new report from Good Jobs First. The Fiscal Policy Report Card from the Cato Institute and the Economic Freedom Index from the Pacific Research Institute were also criticized in the first version. In the first edition of the report, which came out before Fisher explained his problems, he wrote, "The fundamental problem with the indexes is, of course, that none of them do a very good job of measuring what they claim to measure, and most of them don't even try to measure the right things to begin with" (Fisher 2005). In the second edition, he asked three main questions: (1) whether the indices included only relevant variables; (2) whether these variables measured what they were supposed to measure; and (3) how the index combined these measures into a single index number (Fisher, 2013). Fisher's main point is that all five measures would rank the states in the same way if they did what they said they did.

Fisher's finding doesn't mean much because the five indices are used for such different things and each group is an expert in a different area. There is no reason to think that the Tax Foundation's Index, which is based only on state tax laws, would rank the states in the same or a similar way as the Small Business and Entrepreneurship Council's Small Business Survival Index, which takes into account crime rates, electricity costs, and health care, or Beacon Hill's State Competitiveness Report, which looks at infant mortality rates and the number of adults who are working, or the Tax Foundation's Index, which is based only on state tax laws.

The State Business Tax Climate Index from the Tax Foundation shows which states have the best tax systems for business and economic growth. The Index doesn't try to measure economic freedom or opportunity, or even the business environment as a whole. Instead, it looks at business taxes, and its variables reflect this narrower focus. We do this not only because the Tax Foundation knows a lot about taxes, but also because state politicians can change any part of the Index at any time. It's not at all clear what state leaders should do if they want to stop crime, either in the short or long term, but they can change their tax codes right now. Fisher said in the 1970s that the effects of taxes are "small or non-existent," but our study shows that tax considerations have a big impact on business choices.

Fisher doesn't think that tax policies are important to the economic growth of a state, but other authors say the opposite. Bittlingmayer, Eathington, Hall, and Orazem (2005) look at several business climate studies and find that a state's tax climate does affect its economic growth rate and that several measures can predict growth. In particular, they came to the conclusion that "The State Business Tax Climate Index explains growth consistently." Anderson's (2006) study for the Michigan House of Representatives and Kolko, Neumark, and Mejia's (2013) analysis of the ability of 10 business climate indices to predict economic growth both confirmed this finding. Kolko, Neumark, and Mejia found that the State Business Tax Climate Index gives "positive, large, and statistically significant estimates for every specification." They specifically named the Index as one of two business climate indices that predict economic growth.

Bittlingmayer et al. also found that relative tax competitiveness counts, especially at the borders. Because of this, indices that put a high value on tax policies do a better job of explaining growth. They also noticed that studies that focus on one thing explain economic growth at borders better. In the end, the piece says that taxes and regulations are the most important parts of the business climate (Bittlingmayer et al., 2005). These results back up the idea that taxes have an effect on business choices and economic growth, and they also prove that the Index is a good measure.

Fisher and Bittlingmayer et al. have different ideas about how taxes affect the growth of the economy. Robert Tannenwald, who used to work at the Boston Federal Reserve, agrees with Fisher. He says that taxes are not as important to businesses as public spending. Tannenwald compares 22 states by looking at the after-tax rate of return to cash flow of a new facility built by a representative company in each state. This very different method tries to figure out the marginal effective tax rate of a made-up company, and the results make taxes seem like nothing.

Everyone should care about the taxes that businesses pay because they end up being paid for by people through lower wages, higher prices, and less corporate value. Tax policies are not made by states in a vacuum. Every change to a state's tax system makes its business tax situation more or less competitive compared to other states and makes the state more or less attractive to businesses. In the end, both anecdotal and empirical evidence, as well as the fact that most current research agrees that taxes matter a lot to business, show that the Index is an important and useful tool for policymakers who want to make their states' tax systems more business-friendly.


The Tax Foundation’s State Business Tax Climate Index is a hierarchical structure built from five components:
Individual Income Tax Sales Tax Corporate Income Tax Property Tax Unemployment Insurance Tax
Using the economic literature as a guide, we came up with these five factors to rate each state's business tax environment on a scale from 0 (worst) to 10 (best). Each part is about a big part of state taxation and has a lot of different factors. In this study, 125 different things are measured.

In contrast to some measures, the five parts are not given the same amount of weight. Instead, each part is given a weight based on how far the numbers of the 50 states are from the mean. The standard variation of each part is calculated, and that number is used to give each part a weight. The result is that those parts with more variation are given more weight. How much weight each of the five main parts has is:
30.6% — Individual Income Tax 23.5% — Sales Tax 21.1% — Corporate Tax 15.0% — Property Tax 9.8% — Unemployment Insurance Tax
This makes the State Business Tax Climate Index as a whole more useful for explaining things because the parts with bigger standard deviations are the parts of tax law where some states have big advantages over others. When deciding where to open a new location or grow in a state, businesses need to pay more attention to the tax climate when the differences between the states are big. On the other hand, areas of tax law where the scores of all 50 states are close to the mean and grouped together are areas where businesses are more likely to put less weight on tax factors when deciding where to set up shop. For example, Delaware is known to have a big advantage in sales tax competition because its tax rate of zero attracts businesses and shoppers from all over the Mid-Atlantic area. Every time another state raises its sales tax, this edge and the number of people who want to move there grow.

State sales tax rates are different, but unemployment insurance tax systems are similar across the country. This means that a small change in one state's rule could make a big difference in its component ranking.

Within each component, there are two subindices with the same weight that measure the effects of the tax rates and tax bases. Each subindex has one or more factors that make it up. Scalar variables and fake variables are the two types of variables. Scalar variables can have any number between 0 and 10 as their value. If a subindex is made up of only scalar factors, they all have the same weight. A fake variable is one whose value can only be 0 or 1. For instance, a state can either adjust its tax rates for inflation or not. Mixing scalar and dummy variables in a subindex is a bad idea because a dummy's high value can have too much of an effect on the subindex's results. In general, the Index gives scalar variables a weight of 80% and fake variables a weight of 20%. This is done to counteract this effect.

Relative versus Absolute Indexing

The State Business Tax Climate Index is a relative measure, not a perfect or perfected measure. In other words, each variable is ranked based on how high or low it is in other states. The relative scoring system goes from 0 to 10, with 0 meaning not "worst possible" but "worst among the 50 states."

Many states' tax rates are so close to each other that an absolute index would not give enough information about the differences between the states' tax systems, especially for business owners who want to know which states have the best tax system in each area.

States that don't have a tax. One problem with a relative scale is that you can't use math to compare states with a certain tax to states without that tax. As a zero rate is the lowest possible rate and the most neutral base, and as it provides the best environment for economic growth, states with a zero rate on individual income, corporate income, or sales have a huge competitive advantage. So, states that don't have a certain tax usually get a 10, and the Index compares all the other states.

There are three important exceptions to this rule. The first is in Washington, Tennessee, and Texas, which do not tax wages but do tax S companies based on their gross receipts. (These rules also apply to limited liability companies in the states of Washington and Texas.) Since these entities are usually taxed through the person code, they do not get a perfect score in the individual income tax component. The second exception is Nevada, where the individual income tax component also includes a payroll tax that isn't used for jobless insurance. The last exception is in states with no general sales tax, like Alaska, Montana, New Hampshire, Oregon, and Delaware. These states don't have sales taxes, but they don't get a perfect 10 in this section because they also have excise taxes on gasoline, beer, spirits, and cigarettes. Alaska also doesn't have a state sales tax, but local governments can choose to have sales taxes.

Putting Final Scores on a Scale. Using a relative scale within the parts is also bad because the average scores for the five parts are not the same. This changes how much not having a certain tax is worth for the big indices. For example, the average number for the corporate income tax part, without any changes, is

To solve this problem, the scores on the five major parts are "normalized," which brings the average score for all of them to 5, except for places that don't have the given tax. This is done by increasing the score for each state by a fixed number.

Once the results have been standardized, states can be compared across indices. Normalization makes it possible to say, for example, that Connecticut's score of 5.10 on business income taxes is better than its score of 4.80 on sales taxes.

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 2023 Index and represents the tax climate of each state as of July 1, 2022, the first day of fiscal year 2023 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.

Past Rankings and Scores

This report includes 2014-2021 Index rankings that can be used for comparison with the 2022 rankings and scores. These can differ from previously published Index rankings and scores due to the 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.

Corporate Tax

This part of the score looks at how each state's main tax affects business actions. It makes up 21,1% of each state's total score. It is well known that the amount of taxes a business pays can affect how much economic activity a business has in a state. For instance, Newman (1982) found that differences in state company income taxes were a big reason why industry moved to the South. After 20 years, when global investment had grown a lot, Agostini and Tulayasathien (2001) found that a state's business tax rate is the most important tax for foreign investors when deciding where to put their money.

Most states have standard business income taxes that are based on profit (gross sales minus costs). Some states, on the other hand, have a problem with taxing businesses based on their gross income with few or no deductions for costs. For example, Ohio's 0.26 percent Commercial Activities Tax (CAT) was brought in from 2005 to 2010. The Business and Occupation (B&O) Tax in Washington is a tax on a business's gross sales that has different rates for different industries. The Manufacturers' and Merchants' License Tax in Delaware is the same as the Business Tax in Tennessee, the Business/Professional/Occupational License (BPOL) tax in Virginia, and the Business & Occupation (B&O) tax in West Virginia. In 2007, Texas also added the Margin Tax, which is a difficult gross receipts tax. In 2015, Nevada passed the gross receipts-based multi-rate Commerce Tax, and in 2020, Oregon started a new gross receipts tax with some changes. But in 2011, Michigan passed a major corporate tax change that got rid of the state's modified gross receipts tax and replaced it with a 6 percent corporate income tax, which went into effect on January 1, 2012. The old tax had been in place since 2007, and Michigan was the third state to get rid of it after Kentucky and New Jersey. In 2017, several states thought about putting gross income taxes in place, but none of them did.

Since taxes on gross receipts and taxes on company income are based on different things, the Index compares gross receipts taxes and corporate income taxes separately.

For states with corporate income taxes, the corporate tax rate subindex is calculated by looking at three important factors: the top tax rate, the amount of taxable income at which the top rate comes in, and the number of brackets. States that don't have either a corporate income tax or a gross receipts tax have a perfectly neutral company income tax system and get a perfect score.

Most of the time, states that have a business tax and have a low rate will do well. States that have a high rate or a complicated system with many different rates do not do well.

To figure out the parallel subindex for the corporate tax base, three large areas are looked at: tax credits, how net operating losses are handled, and a "other" category that includes things like compliance with the Internal Revenue Code, protections against double taxation, and how "throwback" income is taxed, among others. States that do well on the corporate tax base subindex usually have few company tax credits, generous carryback and carryforward provisions, deductions for net operating losses, compliance with the Internal Revenue Code, and provisions that prevent double taxation.
Table 3. Corporate Tax Component of the State Business Tax Climate Index (2014–2023)
  Prior Year Ranks 2022 2023 2022-2023 Change
State 2014 2015 2016 2017 2018 2019 2020 2021 Rank Score Rank Score Rank Score
Alabama 23 24 22 14 21 22 23 23 17 5.53 18 5.52 -1 -0.01
Alaska 25 26 26 25 26 25 25 25 27 5.10 28 5.09 -1 -0.01
Arizona 22 22 20 19 14 16 21 22 23 5.31 23 5.29 0 -0.02
Arkansas 36 36 38 38 38 39 33 33 29 4.90 29 4.96 0 0.06
California 29 31 33 32 31 37 27 27 46 4.06 46 4.05 0 -0.01
Colorado 19 13 15 18 18 6 7 9 6 6.03 7 6.00 -1 -0.03
Connecticut 27 29 31 31 30 33 26 26 26 5.10 27 5.09 -1 -0.01
Delaware 50 50 50 50 50 50 50 50 50 2.41 50 2.41 0 0.00
Florida 13 14 16 19 19 11 9 6 7 5.99 10 5.77 -3 -0.22
Georgia 9 10 10 11 10 8 6 7 8 5.92 8 5.90 0 -0.02
Hawaii 5 5 4 6 11 12 17 19 19 5.48 19 5.46 0 -0.02
Idaho 17 21 21 23 23 27 28 28 28 5.02 26 5.10 2 0.08
Illinois 43 44 32 24 35 36 35 35 38 4.48 38 4.47 0 -0.01
Indiana 28 27 23 22 22 19 11 12 11 5.75 11 5.74 0 -0.01
Iowa 48 48 48 48 48 46 48 46 33 4.86 34 4.85 -1 -0.01
Kansas 35 35 37 37 37 31 34 30 21 5.39 21 5.38 0 -0.01
Kentucky 24 25 25 26 24 15 13 15 15 5.62 15 5.60 0 -0.02
Louisiana 16 20 35 39 39 34 36 34 34 4.76 32 4.87 2 0.11
Maine 41 42 41 40 40 32 37 36 35 4.59 35 4.58 0 -0.01
Maryland 14 15 17 21 20 26 31 32 32 4.87 33 4.86 -1 -0.01
Massachusetts 32 34 36 35 34 38 38 37 36 4.56 36 4.55 0 -0.01
Michigan 8 8 8 9 8 13 18 20 20 5.44 20 5.42 0 -0.02
Minnesota 40 40 42 42 41 43 45 43 43 4.15 43 4.13 0 -0.02
Mississippi 10 11 12 12 12 14 10 13 13 5.66 13 5.64 0 -0.02
Missouri 4 4 3 5 5 4 3 3 3 6.79 3 6.77 0 -0.02
Montana 15 16 18 13 13 9 20 21 22 5.35 22 5.34 0 -0.01
Nebraska 34 28 27 27 27 28 30 31 31 4.88 30 4.92 1 0.04
Nevada 1 1 24 33 32 21 24 24 25 5.19 25 5.18 0 -0.01
New Hampshire 47 47 47 47 43 45 42 44 44 4.10 44 4.10 0 0.00
New Jersey 37 37 39 41 44 49 49 48 48 3.51 48 3.50 0 -0.01
New Mexico 33 33 30 29 25 23 22 11 12 5.74 12 5.72 0 -0.02
New York 21 19 11 8 7 18 14 16 24 5.21 24 5.19 0 -0.02
North Carolina 26 23 7 4 3 3 4 4 4 6.17 5 6.15 -1 -0.02
North Dakota 20 18 14 16 16 17 19 8 9 5.91 9 5.90 0 -0.01
Ohio 45 43 46 46 47 42 41 40 39 4.44 39 4.43 0 -0.01
Oklahoma 11 9 9 10 9 20 8 10 10 5.82 4 6.20 6 0.38
Oregon 30 32 34 34 33 29 32 49 49 2.80 49 2.79 0 -0.01
Pennsylvania 42 41 43 43 42 44 44 42 42 4.16 42 4.15 0 -0.01
Rhode Island 38 38 29 30 29 35 40 39 40 4.41 40 4.39 0 -0.02
South Carolina 12 12 13 15 15 5 5 5 5 6.07 6 6.05 -1 -0.02
South Dakota 1 1 1 1 1 1 1 1 1 10.00 1 10.00 0 0.00
Tennessee 44 45 44 44 45 48 47 45 45 4.08 45 4.07 0 -0.01
Texas 49 49 49 49 49 47 46 47 47 4.00 47 3.98 0 -0.02
Utah 6 6 5 3 4 7 12 14 14 5.63 14 5.63 0 0.00
Vermont 39 39 40 36 36 40 43 41 41 4.33 41 4.31 0 -0.02
Virginia 7 7 6 7 6 10 15 17 16 5.56 17 5.54 -1 -0.02
Washington 46 46 45 45 46 41 39 38 37 4.49 37 4.47 0 -0.02
West Virginia 18 17 19 17 17 24 16 18 18 5.48 16 5.60 2 0.12
Wisconsin 31 30 28 28 28 30 29 29 30 4.89 31 4.88 -1 -0.01
Wyoming 1 1 1 1 1 1 1 1 1 10.00 1 10.00 0 0.00
District of Columbia 37 37 37 26 26 24 27 27 28 5.05 29 5.04 -1 -0.01

Note: A rank of 1 is best, 50 is worst. All scores are for fiscal years. DC’s score and rank do not affect other states.
Source: Tax Foundation.

Corporate Tax Rate

The corporate tax rate subindex is meant to measure how a state's corporate income tax top marginal rate, bracket structure, and gross receipts rate affect its competitiveness compared to other states. This is because the level of taxation can affect how much economic activity a business has in a state (Newman, 1982).

A state's corporate tax is in addition to the federal corporate income tax of 21 percent, which was cut significantly by the Tax Cuts and Jobs Act of 2017 from a graduated-rate tax with a top rate of 35 percent, the highest rate among developed nations. South Dakota and Wyoming are the only two states that do not tax either the income or the sales of businesses. On this subindex, these states instantly get a 10 out of 10. So, this part shows how the other 48 states compare to each other.

Highest Tax Rate. The worst rate is 11.5 percent in New Jersey, which includes a short and retroactive surcharge from 2020 to 2023. The rate in Pennsylvania is 9.99 percent, which is second worst. Other states with relatively high business income tax rates are Alaska (9.4%), Iowa (9.8%), Maine (8.93%), California (8.84%), and Minnesota (9.8%). North Carolina, on the other hand, has the lowest rate in the country at 2.5%, followed by Missouri and Oklahoma, both at 4%, North Dakota, at 4.31, and Florida, at 4.458. Other states with relatively low top business tax rates are Colorado (4.55 percent), Arizona and Indiana (both at 4.9 percent), Utah (4.95 percent), and Kentucky, Mississippi, and South Carolina, all at 5 percent.

Rates that go up and down. Multiple-rate business income tax systems put a drag on the economy. This is measured by the income level where the highest tax rate starts to apply and the number of tax brackets. Single-rate methods are the best, and they are used in 29 states and the District of Columbia. Single-rate systems follow the good tax ideas of keeping things simple and fair. In corporate taxation, there is no "ability to pay" idea in the same way that there is in individual taxation. Loyola University Chicago School of Law's Kathleen and Bernard Beazley Professor of Law Jeffery Kwall says 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.

A single-rate system makes it less likely that businesses will do expensive and ineffective tax planning to make up for the damage caused by higher marginal tax rates in some states as taxable income goes up.

The First Round. This variable shows how quickly a state's highest business income tax rate is applied. A single-rate system with only one tax bracket for the first dollar of taxable income gets the best score. Next best is a two-bracket system where the top rate starts at a low income level. This is because the lower the top rate starts, the more like a flat tax the system is. The worst score goes to states with many income groups that cover a wide range.

How many brackets. When a taxpayer's income hits the end of one tax bracket and moves into a higher bracket, the tax system makes them change how they act. At this point, the incentives change, so having multiple rate changes is worse for the economy than having a single rate. This variable is meant to measure how much the business income tax makes it harder for incomes to go up. The 29 states and the District of Columbia that have a single-rate system get the best score for this factor. In this area, Alaska's 10-bracket system gets the lowest score. Arkansas has a system with five brackets, and Maine and New Jersey both have systems with four groups.

Corporate Tax Base

This subindex tracks how each state's idea of what should be taxed as a business affects the economy.

The availability of certain credits, deductions, and exemptions; the ability of taxpayers to deduct net operating losses; and a number of smaller tax base issues that make up the other third of the corporate tax base subindex are all used to measure how competitive each state's corporate tax base is.

Under a gross receipts tax, some of these tax base factors (net operating losses and some corporate income tax base variables) are replaced by the fact that employee compensation costs and cost of goods sold can be deducted from gross receipts. States are rewarded for allowing these deductions because they reduce the biggest problem with using gross receipts as the basis for company taxation: the fact that different industries pay different effective tax rates based on how many levels of production are taxed.

Losses from doing business. The corporate income tax is meant to only tax a company's gains. But a view of a company's profits once a year might not show how profitable it really is. For example, a company in an industry with a lot of ups and downs may look very profitable when times are good but lose a lot of money when times are bad. When the whole business cycle is looked at, the company may have an average profit margin.

The exclusion for net operating losses (NOL) helps make sure that the corporate income tax is, on average, a tax on how much money a company makes. Without the NOL credit, companies in industries that go up and down pay much more in taxes than those in industries that stay the same, even if their average profits are the same over time. Simply put, the NOL deduction helps level the playing field between businesses that go through cycles and those that don't. Under the Tax Cuts and Jobs Act, losses can be carried forward indefinitely, but they can only lower an individual's taxable income by up to 80% in any given year. Gross receipts taxes make it impossible to carry net operating losses backwards or forwards. Because of this, the Index treats states with statewide gross receipts taxes as if they didn't have any NOL carryback or carryforward laws.

Despite having record surpluses, California has briefly stopped its net operating loss provisions as a way to bring in more money during the pandemic. It is the only state that doesn't have an active NOL provision, and all NOL variables give it the lowest number.

The number of years that can be carried back or carried forward. This variable shows how many years a NOL penalty can be carried back or carried forward. The likelihood that the corporate income tax is based on the average profit of the company goes up as the length of time goes up. In general, the carryforward (up to a maximum of 20 years) was better for states in FY 2022 than the carryback (up to a maximum of 3 years). States do well on the Index if they follow the new federal rules or have a strong system of carryforwards and carrybacks of their own.

There are limits on how much you can carry back or forward. When a company has a NOL that is bigger than what it can claim in one year, most states let it carry any amount of deductions back to past years or forward to future years. The Index ranks states lower that limit these numbers. Idaho and Montana are the only two states that limit the number of carrybacks. However, they are better than many other states in that they allow carrybacks at all. Only Illinois, New Hampshire, and Pennsylvania put limits on losses that can be carried forward. Other states do not. Illinois's cap is new and is only meant to be in effect for the tax years 2021 through 2024. So, these states get low marks for this variable.

Gross Income Tax Breaks. Proponents of gross receipts taxation always point out that the government gets a more steady flow of tax money than it does from corporate income taxes, but this steadiness comes at a very high price. Gross receipts taxes have rates that look very cheap on paper. This is a trick. Since gross receipts taxes are paid many times during the production process, the actual tax rate on a product is much higher than the statutory rate would suggest. Under a gross receipts tax, effective tax rates vary a lot by field or business, which goes against the idea that taxes should be the same for everyone. Under a gross revenue tax, firms with fewer steps in their production chain pay less in taxes, and high-margin, vertically-integrated firms do well, while firms with longer production chains pay a lot more in taxes. Because of this economic imbalance, lawmakers are often forced to set different rates for each business, which is unfair and inefficient.

To lessen this damage, states can allow deductions from gross receipts for employee compensation costs and cost of goods sold, which is essentially the same as a normal corporate income tax.

The states with the worst gross receipts taxes are Delaware, Nevada, Ohio, Oregon, Tennessee, and Washington. This is because neither the cost of things sold nor employee pay can be deducted in full from their gross receipts taxes. Texas lets you deduct either the cost of things sold or the pay of your employees, but not both. The Virginia BPOL tax, the West Virginia B&O tax, and the Pennsylvania business privilege tax are not included in this survey because they are charged at the local level and are not the same across the state.

State taxes are based on federal income. States that use the federal meaning of income make it easier for their taxpayers to pay their taxes. Arkansas and Mississippi do not agree with how the federal government defines business income, so they do not do well.

Federal ACRS and MACRS Depreciation Allowance. The huge number of government depreciation schedules is a tax nightmare for businesses in and of itself. From a tax difficulty point of view, the idea of having 50 different schedules would be terrible. This variable shows how much each state has used the government depreciation schedules for the Accelerated Cost Recovery System (ACRS) and the Modified Accelerated Cost Recovery System (MACRS). One state, California, makes things more complicated by not fully following the federal scheme.

Depreciation can be deducted. The deduction for decline works the same way as the deduction for wear and tear, but it is used for natural resources. Like with depreciation, if all 50 states had their own depletion rates, taxes would be a huge mess. This variable shows how far the states have gone in following the federal depletion plans. Alaska, California, Delaware, Iowa, Louisiana, Maryland, Minnesota, Mississippi, New Hampshire, North Carolina, Oklahoma, Oregon, and Tennessee are all punished because they do not fully follow the federal system.

Different Minimum Tax. The government Alternative Minimum Tax (AMT) was made so that all taxpayers paid at least a certain amount of taxes each year. Unfortunately, it does this by making a tax system that runs alongside the normal business income tax code. Evidence shows that the AMT doesn't make things more fair or more efficient in any significant way. It doesn't bring in much money for the government, and the costs of complying with it are sometimes higher than the money it brings in. This makes companies less likely to invest or change where they invest (Chorvat and Knoll, 2002). So, states that copy the federal AMT hurt themselves by making their taxes more complicated than they need to be.

Five states, California, Iowa, Kentucky, Minnesota, and New Hampshire, all have an AMT on businesses, which hurts their scores.

Taxes Paid Can Be Taken Off. This variable measures the amount of double taxation on income that was used to pay foreign taxes. This means that the person has to pay a tax on money that was already sent to foreign taxing authorities. States can stop this from happening by letting people reduce taxes paid to other countries. Twenty-three states accept deductions for taxes paid in other countries, and those states do well. The remaining states that tax corporate income do not accept deductions for taxes paid to other countries, so they do not do well.

The Tax Code is put on an index. If a state has a business income tax with more than one bracket, it is important to adjust the brackets for inflation. This keeps taxes from going up de facto when basic income goes up because of inflation. Simply put, this "inflation tax" means that taxpayers have to pay more taxes, generally without their knowledge or permission. Alaska, Arkansas, Hawaii, Iowa, Kansas, Louisiana, Maine, Mississippi, Nebraska, New Jersey, New Mexico, New York, North Dakota, Oregon, and Vermont, which all have graduated corporate income taxes, do not index their tax rates.

Bring back. So that corporate income isn't taxed twice, states use apportionment methods to figure out how much of a company's income each state can tax. In general, states require a company with nexus (enough ties to the state to give the state the right to tax the company's income) to divide its income between the state and itself based on a ratio of the company's in-state property, payroll, and sales to its total property, payroll, and sales.

There isn't much agreement among the 50 states about how to divide up the money. Many states put the same amount of weight on all three factors, while others put more weight on sales. This is a new trend in state tax policy. Since many businesses sell into states where they have no nexus, these companies can end up with "nowhere income," or income that is not taxed by any state. To stop this from happening, many states have what are called "throwback rules." These rules find income that was earned nowhere and send it back to a state where it will be taxed, even though it was not made there.

The throwback and throwout rules for sales of tangible property add another layer of confusion to the tax system. Since "nowhere" income could be claimed by two or more states, rules must be made and followed to decide who gets to tax it. States that tax business income are almost evenly split between those with and without throwback rules. 22 states and the District of Columbia do have throwback rules.

Section 168(k): Using the money. Since corporate income taxes are supposed to be based on net income, they should include deductions for business costs, such as investments in machinery and equipment. In the past, companies, on the other hand, had to write down the value of these purchases over time. In recent years, the federal government offered "bonus depreciation" to speed up the discount for these investments. Under the Tax Cuts and Jobs Act, investments in machinery and equipment are fully deductible in the first year. This is called "full expensing." Nineteen states offer full expensing, just like the federal government does. Two states offer something called "bonus depreciation" instead of full expensing.

Limit on net interest. Federal law now limits how much you can deduct for business interest. You can only take 30% of your adjusted income, but you can carry over the rest to future tax years. This change was made to get rid of the bias in the federal code that favored debt financing over equity financing. However, when states adopt this limitation without also adopting its counterbalance, full expensing, investment costs go up.

Putting GILTI in. In the past, most states have avoided collecting foreign income. After the federal tax reform, however, some states have used the federal provision for the taxation of Global Low-Taxed Intangible Income (GILTI), which was meant to protect the new federal territorial system of taxation, as a way to expand their tax bases to include foreign business activity. States that tax GILTI are penalized in the Index. States that tax GILTI in a moderate way (for example, by adopting the Section 250 deduction) get partial credit, and states that decouple or almost fully decouple from GILTI are rewarded (for example, by treating GILTI as largely deductible foreign dividend income in addition to the Section 250 deduction).

Tax Credits

Many states offer tax credits that lower the effective tax rates for certain industries and investments. These credits are often given to big companies from outside the state that are thinking about moving there. Policymakers make these deals under the guise of creating jobs and growing the economy, but the truth is that if a state needs to offer these kinds of deals, it probably has a bad tax environment for businesses. Economic development and job creation tax credits make the tax system more complicated, narrow the tax base, raise tax rates for businesses that don't qualify, mess up the free market, and don't always help the economy grow.

A better way to do things is to improve the business tax atmosphere in a systematic way over time. So, this part gives high scores to the states that don't offer the following tax credits and low scores to the states that do.

Tax credits for investments. Investment tax credits usually reduce a company's tax bill if it buys new land, plants, equipment, or machinery in the state that offers the credit. Sometimes, the new investment will need to be "qualified" and accepted by the state's economic development office. Investment tax credits mess up the market because they encourage people to put their money into new property instead of fixing up old property.

Tax credits for jobs. Job tax credits are often used to reduce a company's tax bill if it creates a certain number of jobs over a certain amount of time. Sometimes, the new jobs need to be "qualified" and accepted by the state's economic development office. This is supposed to stop companies from saying that jobs that were moved were actually new jobs. Even if job tax credits are handled well, they can go wrong in a number of ways. They make companies that would do better financially if they spent more on new equipment or marketing instead hire more people. They also help businesses that are already growing and hurt businesses that are already having trouble. So, states that give these kinds of points get a low score on the Index.

Tax credits for research and development, or R&D. Research and development tax credits lower a company's tax bill if it spends money on "qualified" research and development. The idea behind R&D tax credits is that they will encourage basic study that isn't profitable in the short term but is better for society in the long run. In reality, the problems they cause, like making the tax system much more complicated and making a government agency decide what kinds of research meet a hard-to-measure standard, far outweigh the possible benefits. So, states that give these kinds of points get a low score on the Index.

Individual Income Tax

The individual income tax component, which makes up 30.6% of each state's overall Index score, is important to business because many businesses, such as sole proprietorships, partnerships, and S corporations, report their income through the individual income tax code.

Taxes can have a big effect on a person's choice to start their own business and work for themselves. Gentry and Hubbard (2004) found that "the level of the marginal tax rate has a negative effect on people starting their own businesses, and the progressive nature of the tax discourages people from starting their own businesses, especially for some groups of households." Using education as a way to measure how likely people are to come up with new ideas, Gentry and Hubbard found that a "progressive tax system discourages people of all educational backgrounds from going into self-employment." Also, Gentry and Hubbard, quoting Carroll, Holtz-Eakin, Rider, and Rosen (2000), say that "higher tax rates reduce investment, hiring, and small business income growth" (p. 7). Individual income tax systems that aren't as fair hurt business and the company tax climate in a state.

The cost of workers is another important reason why individual income tax rates are important for businesses. Labor is usually one of the biggest costs for a business, so anything that hurts the labor pool will also affect business choices and the economy as a whole. Complex, poorly planned tax systems that take too much money in taxes hurt both the number and quality of people who want to work. Wasylenko and McGuire (1985) came to the same conclusion. They found that individual income taxes affect companies indirectly by affecting where people choose to live. A progressive, multiple-rate income tax makes this problem worse because the marginal tax rate goes up as income goes up, making work less valuable compared to pleasure.

For example, let's say a worker has to choose between an extra hour of work that pays $10 and an extra hour of free time that pays $9.50. The smart thing to do would be to work for another hour. But if a 10% income tax rate makes the value of an hour's work drop to $9 after taxes, a smart person would stop working and use that hour to do something fun. Also, workers with better wages, like $30 per hour, who face higher marginal tax rates, like 20%, are less likely to work more hours. In this case, the worker's hourly wage after taxes is $24, so those who value their free time more than $24 per hour will choose not to work. In this example, the after-tax wage is $6 less than the before-tax wage, while in the previous example, it was only $1 less. This means that more workers will choose to spend their time doing something else. Overall, the income tax makes less people ready to work.

The individual income tax rate subindex measures how tax rates affect the last dollar of a person's income. It does this by looking at the top tax rate, the graduated rate structure, and the standard deductions and exemptions, which are treated as a zero percent tax bracket. The rates and brackets are for a single taxpayer, not for a married pair filing a joint return.

The individual income tax base subindex looks at steps put in place to stop double taxation, whether the tax code is adjusted for inflation, and how it treats married couples compared to single people. States that score well make sure that married people aren't taxed more than they would be if they filed as two single people. They also protect taxpayers from being taxed twice by recognizing LLCs and S corporations under the individual tax code and indexing their rates, exemptions, and deductions for inflation.

States that don't tax people's incomes usually get a perfect score, and states that do tax people's incomes usually do well if they have a flat, low tax rate with few exemptions and credits. States that don't do well have complicated, multiple-rate schemes.

Alaska, Florida, South Dakota, Tennessee, Texas, Washington, and Wyoming, which don't have a personal income tax or a payroll tax for people who don't get UI, scored the best on this part. Nevada also does very well in this part of the Index. Its non-UI payroll tax has a low tax rate on wage income, but not on unearned income. New Hampshire also does well because it doesn't tax pay and salaries. Instead, it taxes interest and dividends, which are forms of income. The states with the best scores are Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, North Carolina, Pennsylvania, and Utah, all of which have a single, low tax rate.

States with high tax rates and bracket designs that change a lot from one year to the next score low on this factor. Most of the time, they don't adjust their brackets, exemptions, and deductions for inflation. They also don't let you deduct taxes from other countries or states, penalize married couples who file separately, and don't recognize LLCs and S corporations.
Table 4. Individual Income Tax Component of the State Business Tax Climate Index (2014–2023)
  Prior Year Ranks 2022 2023 2022-2023 Change
State 2014 2015 2016 2017 2018 2019 2020 2021 Rank Score Rank Score Rank Score
Alabama 23 25 25 25 25 31 31 29 28 4.90 30 4.89 -2 -0.01
Alaska 1 1 1 1 1 1 1 1 1 10.00 1 10.00 0 0.00
Arizona 22 24 18 19 19 19 17 18 18 5.35 16 5.84 2 0.49
Arkansas 34 36 37 40 40 40 40 42 38 4.32 37 4.48 1 0.16
California 50 50 50 50 50 49 49 50 49 2.06 49 2.06 0 0.00
Colorado 15 14 14 14 14 13 13 13 14 5.90 14 5.89 0 -0.01
Connecticut 42 42 46 47 47 43 45 47 47 3.41 47 3.41 0 0.00
Delaware 43 43 42 44 44 44 44 44 44 3.81 44 3.81 0 0.00
Florida 1 1 1 1 1 1 1 1 1 10.00 1 10.00 0 0.00
Georgia 33 35 35 35 35 37 36 36 35 4.72 35 4.72 0 0.00
Hawaii 47 47 47 38 38 47 47 46 46 3.46 46 3.46 0 0.00
Idaho 20 21 23 24 24 23 25 24 20 5.20 19 5.32 1 0.12
Illinois 10 15 11 11 13 14 14 12 13 5.91 13 5.90 0 -0.01
Indiana 14 13 15 15 15 15 15 14 15 5.85 15 5.84 0 -0.01
Iowa 41 41 41 42 42 42 41 40 40 4.27 40 4.26 0 -0.01
Kansas 16 17 17 17 18 21 22 21 22 5.10 22 5.10 0 0.00
Kentucky 36 38 38 37 37 17 18 17 17 5.54 18 5.54 -1 0.00
Louisiana 32 33 32 32 31 35 35 35 34 4.73 25 5.02 9 0.29
Maine 26 28 34 31 32 25 20 22 23 5.09 23 5.08 0 -0.01
Maryland 44 44 43 46 46 45 43 45 45 3.66 45 3.66 0 0.00
Massachusetts 12 11 12 12 11 11 11 16 11 6.00 11 6.10 0 0.10
Michigan 13 12 13 13 12 12 12 11 12 5.98 12 5.97 0 -0.01
Minnesota 45 45 44 45 45 46 46 43 43 3.90 43 3.89 0 -0.01
Mississippi 21 22 24 23 23 28 28 27 26 4.96 26 4.99 0 0.03
Missouri 31 32 31 33 33 27 23 20 21 5.14 21 5.15 0 0.01
Montana 18 19 20 20 20 22 24 23 24 5.05 24 5.07 0 0.02
Nebraska 38 34 33 34 34 30 30 30 29 4.87 32 4.87 -3 0.00
Nevada 1 1 1 1 1 5 5 5 5 8.51 5 8.50 0 -0.01
New Hampshire 9 9 9 9 9 9 9 9 9 6.36 9 6.35 0 -0.01
New Jersey 48 48 48 48 48 50 50 49 48 2.09 48 2.09 0 0.00
New Mexico 19 20 22 22 22 26 27 26 36 4.54 36 4.54 0 0.00
New York 49 49 49 49 49 48 48 48 50 1.88 50 1.88 0 0.00
North Carolina 37 16 16 16 16 16 16 15 16 5.76 17 5.76 -1 0.00
North Dakota 27 23 21 21 21 18 19 25 25 4.98 27 4.97 -2 -0.01
Ohio 46 46 45 43 43 41 42 41 41 4.23 41 4.23 0 0.00
Oklahoma 29 30 29 28 28 32 32 31 30 4.85 31 4.88 -1 0.03
Oregon 35 37 36 36 36 38 39 38 42 4.00 42 4.00 0 0.00
Pennsylvania 17 18 19 18 17 20 21 19 19 5.22 20 5.18 -1 -0.04
Rhode Island 25 27 27 27 27 24 26 32 31 4.83 33 4.82 -2 -0.01
South Carolina 30 31 30 30 30 34 34 34 33 4.79 28 4.89 5 0.10
South Dakota 1 1 1 1 1 1 1 1 1 10.00 1 10.00 0 0.00
Tennessee 8 8 8 8 8 8 8 8 6 8.29 6 8.28 0 -0.01
Texas 6 6 6 6 6 6 6 6 7 8.00 7 7.99 0 -0.01
Utah 11 10 10 10 10 10 10 10 10 6.10 10 6.11 0 0.01
Vermont 40 40 40 41 41 36 38 39 39 4.32 39 4.30 0 -0.02
Virginia 28 29 28 29 29 33 33 33 32 4.79 34 4.79 -2 0.00
Washington 6 6 6 6 6 6 6 6 7 8.00 8 6.87 -1 -1.13
West Virginia 24 26 26 26 26 29 29 28 27 4.90 29 4.89 -2 -0.01
Wisconsin 39 39 39 39 39 39 37 37 37 4.38 38 4.35 -1 -0.03
Wyoming 1 1 1 1 1 1 1 1 1 10.00 1 10.00 0 0.00
District of Columbia 47 47 46 49 49 47 47 48 48 2.87 48 2.62 0 -0.25

Note: A rank of 1 is best, 50 is worst. All scores are for fiscal years. DC’s score and rank do not affect other states.
Source: Tax Foundation.

Individual Income Tax Rate

The rate subindex compares the states that tax individual income after taking out Alaska, Florida, South Dakota, and Wyoming, which do not. These five states get perfect scores because they do not tax individual income. Tennessee, Texas, and Washington do not tax the income of individuals, but they do tax the income of S corporations and LLCs through their gross profits taxes, so they do not get a perfect score in this category. Wage income is taxed at a low rate in Nevada. New Hampshire, on the other hand, does not tax income from wages and salaries, but it does tax income from interest and dividends.

Top Tax Rate on Extra Income. The top income tax rate in California is 13.3%, which is the highest of any state. Other states with high top rates are Hawaii (11.0%), New York (10.9%), New Jersey (10.75%), Oregon (9.9%), Minnesota (9.85%), Vermont (8.75%), Iowa (8.53%), and Oregon (9.9%).

North Dakota (2.9 percent), Arizona (2.98 percent), Pennsylvania (3.07 percent), Indiana (3.23 percent), Ohio (3.99 percent), Michigan (4.25 percent), Louisiana (4.25 percent), Colorado (4.55 percent), and Utah (4.85 percent) have the lowest top legal rates. In Alabama, Kentucky, Mississippi, and New Hampshire, the highest amount allowed by law is 5%. Illinois and Kansas, which used to have rates below 5%, have both raised their rates in the past few years. (Illinois's legal rate is 4.95 percent, but pass-through businesses pay an extra 1.5 percent tax, which we've talked about elsewhere. This brings the rate for pass-through businesses to 6.45 percent.)

Some states also have city income tax rates on top of the state income tax rates. We show these as the mean of the rates in the capital city and the place with the most people. In some cases, when states allow local income taxes, they still keep the overall amount of income taxes low. For example, Alabama, Indiana, Michigan, and Pennsylvania all have local income add-ons, but their total rates are still among the lowest.

The limit for the top tax bracket. This variable measures how much a pass-through business's after-tax return on investment falls as its net income goes up. States are rewarded for having a top rate that starts at a lower amount of income, because this is similar to a flat-rate system that doesn't cause as many problems. For example, Alabama has a progressive income tax system with three income tax rates. But Alabama's top rate of 5% applies to all taxable income over $3,000. This means that the state's income tax rate structure is almost flat.

States with flat-rate systems do best on this variable because their top rate starts at the first dollar of income (after taking into account the standard deduction and personal exemption). These states are Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, New Hampshire, North Carolina, Pennsylvania, and Utah. States with high amounts of "kick-in" do the worst. These states include New York (with taxed income of $25 million), New Jersey ($1 million), California ($1 million), Connecticut ($500,000), and North Dakota ($445,000).

How many brackets. Before adding up income tax brackets, the Index changes exemptions and normal deductions to a zero bracket. From an economic point of view, regular deductions and exemptions are the same as an extra tax bracket with a tax rate of zero.

For example, Kansas has a standard deduction of $3,500 and a personal exemption of $2,250, for a total of $5,750. By law, Kansas has a top rate on all taxable income over $30,000 and two lower rates, one starting at the first dollar of income and the other at $15,000. This gives it an average band width of $10,000. But because of its deductions and exemptions, Kansas's top rate doesn't start until you make $35,750. Below that, there are three tax groups with an average difference of $11,917. Standard deductions and exclusions come in many different sizes.

The best score in this category goes to Pennsylvania, which has only one tax rate (a flat tax with no standard deduction). Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, New Hampshire, North Carolina, and Utah are the only states with only two tax rates. This means that their taxes are flat and they have a standard deduction. Hawaii has the worst score with 12 brackets, followed by California with 10 brackets and then Iowa and Missouri with 9 brackets each.

Size of a typical bracket. At the low end of the income scale, many states have several narrow tax brackets close together, including a zero bracket made up of normal deductions and exemptions. Most people don't pay attention to them because they move through them so fast and pay the highest rate on most of their income. On the other hand, some states have rates that keep going up for people of all income levels. This makes people and small businesses change how they earn money and plan for taxes. This subindex punishes the second group of states by looking at the average width of the bands. States where the average width is small are rewarded, since the top rate is applied to most income in these states, making it more like a flat rate that applies to all income.

Regaining lost money. When a taxpayer passes the top income tax bracket threshold, Connecticut and New York apply the top bracket's tax rate to their previous taxable income. Arkansas, on the other hand, uses different tax tables based on the filer's level of income. The most harmful part of the recapture rule is in New York, where it costs about $22,000 to hit the top bracket. Income recapture provisions are bad policy because they lead to very high marginal tax rates when they go into effect. They are also not clear because they raise tax burdens a lot without being recognized in the statutory rate.

Individual Income Tax Base

Different states have different ideas of what is taxed income, and some make it harder for people to make money than others. The base subindex gives double taxation of taxable income 40% of its weight and a collection of other base problems, such as indexation and marriage penalties, 60% of its weight.

The states with no income tax on individuals are completely neutral. Tennessee and Texas, on the other hand, lose a little because they don't allow LLCs or S companies, and Nevada can't get a perfect score because of its payroll tax. Only interest and profit income is taxed in New Hampshire, while only capital gains income is taxed in Washington. Arizona, Idaho, Illinois, Maine, Michigan, Missouri, Montana, and Utah have the best marks out of the other 43 states. This is because they do not have as many problems with how they define taxable income as other states do. New Jersey, Delaware, New York, California, Connecticut, and Ohio are among the places where the tax base is thought to slow down the economy more than it needs to.

Penalty for Marriage. When a state's standard deduction and tax bands for married taxpayers filing jointly are not double those for single taxpayers, this is called a marriage penalty. So, if two single people file together, they may have a smaller tax bill than a married couple with the same income who file jointly. This is unfair and could hurt your business in a big way. Eighty-five percent of the top earners in the top 20% of taxpayers are married pairs. Hodge (2003A, 2003B) says that this same 20 percent also has the most business owners of any income group. Because of these clusters, marriage penalties could have a big impact on a lot of pass-through companies. There are marriage penalties built into the income tax rates of 23 states and the District of Columbia.

Some states try to get around the marriage penalty by letting married people file as singles or by giving them a tax credit to make up for it. Even though these methods help to reduce the dollar cost of the marriage penalty, they also make taxes more complicated. Still, states that let married people file as singles don't get less points for the marriage punishment.

Capital income is taxed twice. Most state income tax systems are the same as the federal income tax code, which means that capital income is taxed twice. This is the biggest problem with the federal income tax code. The interaction between the business income tax and the individual income tax leads to double taxation. Most capital income, such as interest, dividends, and capital gains, comes from company profits in the end. The business income tax cuts down on the amount of profits that can be used to make interest, dividends, or capital gains in the future. The person who gets this capital income must then report it and pay taxes on it. Because of this, this capital income is taxed twice, once at the corporate level and again at the person level.

All of the states that tax wages do not do well on this measure. People in New Hampshire have to pay taxes on their interest and earnings, but they don't have to pay taxes on their capital gains. Washington gets an even better score on this measure because it taxes some capital gains income but not wage and salary income or income from corporations. Nevada's payroll tax does not apply to income from capital, so it gets a perfect score on this test, just like states that don't tax any income.

State taxes are based on federal income. Even though the federal government's concept of income isn't perfect, states that use it make it easier for people to pay their taxes. Five states, Alabama, Arkansas, Mississippi, New Jersey, and Pennsylvania, get low scores because their definitions of individual wealth do not match what the federal government says.

Alternative Minimum Tax (AMT)

At the federal level, the Alternative Minimum Tax (AMT) was created in 1969 to make sure that all people paid at least a certain amount of taxes every year. Unfortunately, it does this by making a tax system that runs alongside the normal code for individual income tax. AMTs are a bad way to keep tax deductions and credits from making tax debt go away completely. So, states that copy the federal AMT hurt themselves by making their taxes more complicated than they need to be. Five states, California, Colorado, Connecticut, Iowa, and Minnesota, get low marks for making people pay an AMT.

Credit for Taxes Paid

This variable measures the extent of double taxation on income used to pay foreign and state taxes, i.e., paying the same taxes twice. States can avoid double taxation by allowing a credit for state taxes paid to other jurisdictions.

Recognition of Limited Liability Corporation and S Corporation Status

The creation of the limited liability company (LLC) and the S corporation was a big change in the way the federal tax system works. LLCs and S corporations give businesses some of the benefits of incorporation, like limited liability, without the costs of becoming a traditional C company. The gains of these groups are taxed under the rules for individuals. This way, they don't have to pay taxes twice, which is a problem with the corporate income tax system. Every state with a full individual income tax recognizes LLCs in some way, and every state except Louisiana recognizes S corporations in some way. However, states like Delaware, Ohio, Texas, and Washington, which require an extra state election or make the entity file through the state's gross receipts tax, do poorly in this variable.

Indexation of the Tax Code

Indexing the tax code for inflation is critical in order to prevent de facto tax increases on the nominal increase in income due to inflation. This “inflation tax” results in higher tax burdens on taxpayers, usually without their knowledge or consent. Three areas of the individual income tax are commonly indexed for inflation: the standard deduction, personal exemptions, and tax brackets. Twenty-five states index all three or do not impose an individual income tax; 15 states and the District of Columbia index one or two of the three; and 10 states do not index at all.

Sales Taxes

The sales tax in each state makes up 23.7% of its Index number. Taxpayers are used to the kind of sales tax that is added to the price of a good at the point of sale. Most states' sales tax bases include some business inputs, so the rate and structure of the sales tax is a big deal for many companies. The sales tax can also be bad for business because as the sales tax rate goes up, people buy less or look for ways to save money on taxes. Because of this, business moves to places with lower taxes, which means lost income, jobs, and tax money. When a tourist goes from a high-tax state to a nearby low-tax state, they can see the effect of different sales tax rates between states or cities. Along the border in the low-tax state, shopping malls tend to spread out over a large area.

On the plus side, there are at least two good things about sales taxes that are paid on goods and services at the point of sale to the end user. First, they are clear. Customers never think that the tax is part of the price of the things. Second, since they are collected at the point of sale, they are less likely to mess up the economy than taxes that are collected in the middle of production, like a gross receipts tax or sales taxes on business-to-business deals.

There is a lot of research and personal experience that shows that sales taxes hurt the economy. For example, Bartik found in 1989 that high sales taxes, especially sales taxes on tools, hurt small businesses that were just starting out. Companies have also been known to avoid putting factories or other facilities in certain states because the machinery in the plant would have to pay the sales tax in that state.

States with a sales tax that usually doesn't let business inputs out of it get the worst score because they cause the most tax pyramiding and economic confusion. Hawaii, New Mexico, South Dakota, and Washington are all places that tax a lot of things that businesses use. All things and services at the point of sale to the end-user are the best place to start taxing sales.

Excise taxes are a type of sales tax that is put on certain things. Excise taxes are usually (but not always) put on goods that are seen as pleasures or vices. This is because vices are less affected by drops in demand when their prices go up because of the tax. Most often, smoke, alcohol, and gasoline are used as examples. The income tax rates in each state are taken into account in the sales tax part of the Index.

The best sales tax component scores go to Alaska, Delaware, Montana, New Hampshire, and Oregon. These states do not have a state sales tax. Among states that have a sales tax, the ones that do best are those with low general rates, broad bases, and no tax pyramiding. Wyoming, Wisconsin, Maine, Nebraska, Idaho, Michigan, and Virginia do well because their sales taxes are set up well and their income tax rates aren't too high.

On the other end of the scale, Alabama, Washington, Louisiana, California, and Tennessee do the worst. They have high rates and tax a wide range of business inputs, such as utilities, services, manufacturing, and leases. They also keep relatively high excise taxes. At 9.55 percent, the total state and local rates in Louisiana and Tennessee are the highest in the country. In general, these states have high sales tax rates that apply to a wide range of business inputs.
Table 5. Sales Tax Component of the State Business Tax Climate Index (2014–2023)
  Prior Year Ranks 2022 2023 2022-2023 Change
State 2014 2015 2016 2017 2018 2019 2020 2021 Rank Score Rank Score Rank Score
Alabama 50 50 50 49 49 50 50 50 50 2.56 50 2.54 0 -0.02
Alaska 5 5 5 5 5 5 5 5 5 8.07 5 8.04 0 -0.03
Arizona 43 43 43 43 43 40 40 40 40 4.06 41 4.06 -1 0.00
Arkansas 44 45 46 44 44 43 45 45 45 3.73 45 3.74 0 0.01
California 46 46 45 45 46 47 47 47 47 3.37 47 3.36 0 -0.01
Colorado 37 37 37 37 37 37 37 36 38 4.26 40 4.22 -2 -0.04
Connecticut 34 34 32 32 29 29 26 25 23 4.80 23 4.80 0 0.00
Delaware 2 2 1 1 1 2 2 2 2 9.01 2 8.98 0 -0.03
Florida 23 23 23 29 30 22 23 23 21 4.94 21 4.93 0 -0.01
Georgia 27 27 34 31 32 30 30 29 29 4.61 31 4.58 -2 -0.03
Hawaii 31 31 27 26 26 32 29 28 28 4.63 27 4.63 1 0.00
Idaho 14 12 15 15 15 12 12 10 10 5.40 10 5.39 0 -0.01
Illinois 35 35 33 27 27 35 34 39 39 4.22 38 4.28 1 0.06
Indiana 21 22 18 9 9 13 20 20 19 5.01 19 5.01 0 0.00
Iowa 18 18 20 20 19 18 15 15 15 5.17 15 5.17 0 0.00
Kansas 24 25 29 28 28 27 38 37 26 4.72 25 4.70 1 -0.02
Kentucky 11 19 14 13 14 19 14 14 14 5.21 14 5.20 0 -0.01
Louisiana 48 47 48 50 50 48 48 48 48 3.04 48 3.03 0 -0.01
Maine 7 8 8 8 8 9 8 8 8 5.64 8 5.83 0 0.19
Maryland 12 16 17 18 18 17 19 18 27 4.64 30 4.58 -3 -0.06
Massachusetts 19 21 19 19 11 11 13 13 13 5.23 13 5.22 0 -0.01
Michigan 10 10 9 10 12 14 11 11 11 5.38 11 5.38 0 0.00
Minnesota 30 33 26 25 25 26 28 27 31 4.60 29 4.59 2 -0.01
Mississippi 38 39 39 39 39 36 33 32 33 4.49 33 4.47 0 -0.02
Missouri 22 24 25 23 24 25 24 24 25 4.78 26 4.70 -1 -0.08
Montana 3 3 3 3 3 3 3 3 3 8.94 3 8.92 0 -0.02
Nebraska 15 13 12 12 21 8 9 9 9 5.50 9 5.52 0 0.02
Nevada 41 41 41 41 42 45 44 44 44 3.81 44 3.81 0 0.00
New Hampshire 1 1 2 2 2 1 1 1 1 9.05 1 9.02 0 -0.03
New Jersey 40 40 40 40 41 42 42 42 43 3.96 42 3.97 1 0.01
New Mexico 42 42 42 42 40 41 41 41 41 4.05 35 4.39 6 0.34
New York 45 44 44 46 45 44 43 43 42 3.96 43 3.90 -1 -0.06
North Carolina 26 17 21 21 20 24 21 21 20 4.97 20 4.95 0 -0.02
North Dakota 33 32 35 35 35 31 27 30 30 4.60 28 4.59 2 -0.01
Ohio 29 29 30 33 31 28 32 34 35 4.39 36 4.38 -1 -0.01
Oklahoma 36 36 36 36 36 39 39 38 37 4.27 39 4.24 -2 -0.03
Oregon 4 4 4 4 4 4 4 4 4 8.83 4 8.82 0 -0.01
Pennsylvania 20 20 22 22 22 21 17 17 17 5.13 16 5.15 1 0.02
Rhode Island 28 28 24 24 23 23 25 26 24 4.79 24 4.79 0 0.00
South Carolina 32 30 31 30 33 34 31 31 32 4.51 32 4.49 0 -0.02
South Dakota 25 26 28 34 34 33 35 33 34 4.43 34 4.42 0 -0.01
Tennessee 47 48 47 47 47 46 46 46 46 3.53 46 3.53 0 0.00
Texas 39 38 38 38 38 38 36 35 36 4.37 37 4.36 -1 -0.01
Utah 17 14 13 17 17 15 22 22 22 4.93 22 4.93 0 0.00
Vermont 16 15 16 16 16 20 16 16 16 5.13 17 5.10 -1 -0.03
Virginia 9 9 10 11 10 10 10 12 12 5.25 12 5.24 0 -0.01
Washington 49 49 49 48 48 49 49 49 49 2.95 49 2.97 0 0.02
West Virginia 13 11 11 14 13 16 18 19 18 5.04 18 5.02 0 -0.02
Wisconsin 8 7 7 7 7 7 7 7 7 6.02 7 6.01 0 -0.01
Wyoming 6 6 6 6 6 6 6 6 6 6.03 6 6.03 0 0.00
District of Columbia 34 34 34 35 35 32 36 34 37 4.33 39 4.28 -2 -0.05

Note: A rank of 1 is best, 50 is worst. All scores are for fiscal years. DC’s score and rank do not affect other states.
Source: Tax Foundation.

Sales Tax Rate

The tax rate is important, and a state with a high sales tax rate makes it less likely that people will buy things in-state. Consumers will buy more things from other countries or online, which will lead to less business in the state. This subindex tracks the highest possible sales tax rate that applies to shopping in-state and business-to-business transactions that are taxed. Delaware, Montana, New Hampshire, and Oregon do not have any state or city sales taxes, so their rate is 0. Alaska is sometimes included in the list of states with no sales tax because there is no general sales tax there. But Alaska cities and towns can charge sales taxes, and the weighted average of these taxes across the state is 1.76 percent.

The Index looks at how much each state's state and local sales taxes are. Add the general state rate to the weighted average of the county and city rates to get the combined rate.

Rate of state sales tax. Colorado's sales tax rate of 2.9% is the lowest among the 45 states and DC that have a national sales tax. Alabama, Georgia, Hawaii, New York, and Wyoming all have a 4% sales tax at the state level. On the other end is California, which has a state sales tax of 7.25 percent and a local add-on tax that all cities and towns must pay. Indiana, Mississippi, Rhode Island, and Tennessee all have 7 percent, which puts them in a tie for second place. Other states with high rates across the whole state are Minnesota (6.88%) and Nevada (6.85%).

Rates for the local sales tax option. 38 states allow local option sales taxes to be used at the county and/or city level. In some states, the local option sales tax makes the tax amount that consumers pay much higher. In Colorado, for example, local governments add an average of 4.87 percent to the state-level sales tax rate of 2.9%, making the total average sales tax rate to 7.77 percent. This may be an understatement in some places with much higher local add-ons, but the Index figures out a national average of local rates that is similar to the average in other states by giving each local rate a weight.

Alabama and Louisiana have the highest average local option sales taxes (5.24 and 5.10 percent, respectively), and in both states, the average local option sales tax rate is higher than the state sales tax rate. Other states with high local choice sales taxes are Colorado (4.87%), New York (4.52%), and Oklahoma (4.49%).

Louisiana and Tennessee both have a total state and average local sales tax rate of 9.55 percent. Arkansas, Washington, and Alabama all have rates of 9.47 percent, 9.29 percent, and 9.24 percent. Alaska (1.76 percent), Hawaii (4.44 percent), Wyoming (5.36%), Wisconsin (5.43%), and Maine (5.5%) are at the bottom of the list.

Protections for remote sellers. Since the Supreme Court got rid of the rule that you had to be in the state to be required to collect sales tax, all states with sales taxes now require remote sellers to collect and send in sales tax. Most states have set up safe harbors for small sellers and have a single point of contact for all state and local sales taxes. However, a few states don't follow these rules, which makes it very expensive for out-of-state stores to comply. Alabama, Alaska (which only has local sales taxes), Colorado, and Louisiana do not have uniform management, and Kansas does not have a safe place for small sellers.

Sales Tax Base

The sales tax base subindex is computed according to five features of each state’s sales tax:
whether the base includes a variety of business-to-business transactions such as machinery, raw materials, office equipment, farm equipment, and business leases; whether the base includes goods and services typically purchased by consumers, such as groceries, clothing, and gasoline; whether the base includes services, such as legal, financial, accounting, medical, fitness, landscaping, and repair; whether the state leans on sales tax holidays, which temporarily exempt select goods from the sales tax; and the excise tax rate on products such as gasoline, diesel fuel, tobacco, spirits, and beer.
New Hampshire, Delaware, Montana, Oregon, and Alaska, which are at the top of this subindex, are the only states without a general state sales tax. But none of them get a perfect score because they all tax gasoline, diesel, cigarettes, and beer. Wyoming, Kansas, Nebraska, Colorado, Idaho, and Missouri get high marks for their tax bases because they don't have problems with tax pyramiding and stick to low income tax rates. However, Colorado gets low marks because its local tax base doesn't match up with the rest of the state.

Hawaii, Alabama, Washington, California, South Dakota, New Jersey, New Mexico, and Maryland have the lowest marks on the base subindex. Their tax systems slow down economic growth because they tax too many business inputs, not enough customer goods and services, and tax excises at too high of a rate.

Sales tax on transactions between businesses (business inputs). When a business has to pay sales taxes on industrial equipment and raw materials, that tax is added to the price of whatever the business makes with that equipment and those materials. Then, the business has to collect sales tax on its own goods, so a tax is added to a price that already includes taxes. Some businesses are always taxed more than others because of this tax pyramiding, which goes against the idea of neutrality and causes economic problems.

Most of the time, these variables are used in other business processes. For example, a company that makes things will count the cost of getting its finished goods to stores as a big part of its business costs. Most businesses, no matter how big or small, hire accountants, lawyers, and other professionals. If these services are charged, it will cost every business more to do business.

To see how business-to-business sales taxes can change the way the market works, imagine that there was a sales tax on the sale of flour to a bakery. The bakery is not the final user, since the flour will be used to make bread that will be sold to customers. From an economics point of view, it's not clear who will end up paying the tax. The tax could be "passed forward" to the customer or "passed backward" to the shop. How sensitive people are to changes in the price of bread will affect where the tax load falls. If people don't change how often they buy bread when the price goes up, the tax can be passed on to buyers in full. But if people respond to higher prices by buying less, the shop will have to pay the tax as an extra cost of doing business.

If there was a sales tax on all flour sales, the market would be messed up because customers of different companies that use flour have different price sensitivity. Let's say that the bakery can pass on the full tax on flour to the customer, but the pizza place down the street can't. The owners of the pizzeria would have to pay more, and they would make less money. Since profits are a sign of chance in the market, the tax would push people away from making pizza. Fewer people would start their own pizza businesses, and the businesses that were already there would hire fewer people. In both cases, the sales tax on bread and pizza would include a tax on a tax, since the tax on flour would already be built into the price. This is called "tax pyramiding" by economists, and most public finance experts are against adding the sales tax to business inputs because it would lead to tax pyramiding and a lack of openness.

Besley and Rosen found in 1998 that the price of a lot of things went up by the same amount as the tax itself. That means that a rise in sales tax was passed on to customers in the same amount. For other things, though, they found that the price went up by twice as much as the tax. This means that the tax increase is even worse for consumers than most people think. Keep in mind that these sources should only be exempt from sales tax if they are really needed to make something. If they are used by the final consumer, they should be counted as part of the state's sales tax base.

States with a sales tax that usually doesn't let business inputs out of it get the worst score because they cause the most tax pyramiding and economic confusion. Hawaii, New Mexico, South Dakota, and Washington are all places that tax a lot of things that businesses use.

The scope of sales tax. A sales tax base that doesn't hurt the economy is one that includes all final retail sales of goods and services bought by end users. In reality, though, states tend to include most goods but not many services in their sales tax bases, which is becoming more of a problem in an economy that is becoming more service-based. Professor John Mikesell of Indiana University thinks that about 36% of all final consumer purchases across the country are taxed. By exempting any goods or services, the tax base gets smaller, the sales tax rate on the things that still have to pay tax goes up, and the market gets messed up for no reason. But a well-designed sales tax doesn't apply to business costs. So, states that tax services that are used by businesses get a low score on the Index, while states that add more end retail sales of goods and services to their base get a higher score.

Gasoline sales tax. Gasoline is a final retail buy made by consumers, so there is no economic reason to exempt it from the sales tax. All but seven states do, though. Even though all states charge an excise tax on oil, the money from this tax is often used for transportation, making it a different kind of tax than the general sales tax. Five states (Florida, Hawaii, Illinois, Indiana, and Michigan) get a better number because they fully include gasoline in their sales tax base. Several other states get some credit for taxing gasoline sales with an ad valorem tax, but at a lower rate than the general sales tax. At the moment, only city sales taxes are used in New York.

There is sales tax on food. A well-designed sales tax includes all things sold to end users in the tax base. This keeps the tax base broad, keeps rates low, and keeps the market from getting messed up. Many states don't tax food so that low-income people don't have to pay as much in sales tax. But this kind of exemption also helps grocery stores and people with higher incomes. It also makes it more expensive to comply with the law because you have to keep complicated lists of exempt and nonexempt goods that are always changing. Public assistance programs like the Women, Infants, and Children (WIC) program or the Supplemental Nutrition Assistance Program (SNAP) provide more focused help than removing groceries from the sales tax base. Thirteen states have all or part of their sales tax based on food.

Excise Taxes

Excise taxes are sales taxes on a single product. Many of them are meant to make people buy less of the thing that has to pay the tax. Some, like the tax on oil, are often used to pay for specific projects, like building roads.

Gasoline and diesel excise taxes, which are charged per gallon, are generally justified as a form of user tax paid by those who benefit from road construction and maintenance. Even though gas taxes and tolls are one of the best ways to raise money for transportation projects (they're kind of like a user fee for using infrastructure), most businesses use a lot of gasoline, so states with higher rates are less attractive to companies. State excise taxes on gasoline run from 70.95 cents per gallon in California to 15.13 cents per gallon in Alaska. In California, this tax is suspended from June to December 2022. The Index is based on rates established by the American Petroleum Institute. These rates include states' base excise taxes as well as other gallonage-based fees and ad valorem taxes that are put on gasoline. This rate takes into account the general sales tax rates that apply to gasoline. However, states that include gasoline in their sales tax base, even partly, are rewarded in the sales tax breadth measure.

Excise taxes on tobacco, alcohol, and beer can make people less likely to buy them in their own state and more likely to look for cheaper prices in nearby states (Moody and Warcholik, 2004). This has an effect on a wide range of shops, like convenience stores, that sell a lot of cigarettes and beer. Cross-border shopping makes the problem worse for stores near the border of states with lower sales taxes. This is because people move their shopping out of state.

There is also a rising problem with people sneaking goods from states and areas with low tobacco excise taxes into states with high tobacco excise taxes. This makes crime worse and makes it harder for stores to make enough money to pay taxes.

New York ($4.35), Connecticut ($4.35), Rhode Island ($4.25), Minnesota ($3.70), and Massachusetts ($3.51) have the highest tobacco taxes per pack of 20 cigarettes. Missouri (17 cents), Georgia (37 cents), North Dakota (44 cents), North Carolina (45 cents), South Carolina (57 cents), and Idaho (57 cents) have the lowest tobacco taxes.

Tennessee ($1.29), Alaska ($1.07), Alabama ($1.05), Georgia ($1.01), and Hawaii ($0.93) have the highest beer taxes per gallon. On the other hand, Wyoming (2 cents), Missouri and Wisconsin (6 cents), Colorado, Oregon, and Pennsylvania (8 cents each) have the lowest beer taxes per gallon. Washington ($37.81), Oregon ($21.95), and Virginia ($19.89) are the states with the highest taxes on a gallon of liquor.

Property Tax

The property tax part of the Index makes up 14.4% of each state's score. It covers taxes on real and personal property, net worth, and the transfer of assets.

When they are set up right, property taxes are more in line with the benefit principle than most other taxes and can be pretty good for the economy. In the world of public finance, they are also valued for how easy they are to understand compared to other taxes. However, this may be one reason why most people don't like paying property taxes. The Survey of Tax Attitudes done by the Tax Foundation found that local property taxes are seen as the second most unfair state or local tax.

Businesses have to pay property taxes, and the rate of tax on commercial property is often higher than the rate on similar residential land. Also, many cities, towns, and states tax the business's personal property and tools. They can be put on anything from a car to a piece of office furniture to a piece of machinery. They are different from real property taxes, which are put on land and buildings.

In fiscal year 2020, businesses paid more than $839 billion in state and local taxes. Of that amount, $330 billion (39.2%) went to property taxes. Businesses had to pay fees on their real, personal, and utility property (Phillips et al., 2021). Property taxes can be a big problem for businesses, so they can have a big impact on where they choose to be.

Mark, McGuire, and Papke (2000) found that taxes that vary from one place in an area to another could be one of the most important factors in deciding where to move within a region. They find that higher rates of the sales tax and the personal property tax are linked to slower growth in jobs. They think that a one-percentage-point increase in taxes on personal property cuts yearly job growth by 2.44 percentage points.

Bartik (1985) found that property taxes are a major factor in where businesses choose to set up shop. He thinks that a 10 percent increase in business property taxes causes between 1 and 2 percent fewer new plants to open in a state. Bartik's conclusion in 1989, which backs up his earlier results, is that higher property taxes make it harder for small businesses to start up. He says that property taxes have a particularly strong negative effect because they must be paid regardless of profits. Since many small businesses are not profitable in their first few years, high property taxes would have a bigger effect on the choice to start up than taxes based on profits.

States with low property taxes across the whole state are in a better position to draw business investment. By keeping personal property taxes low, cities and towns that are fighting for business can give themselves an edge.

The property tax part of the Index also includes taxes on capital stock, tangible and intangible property, assets, real estate transfers, estates, inheritance, and gifts. New Mexico, Indiana, Idaho, Delaware, Nevada, and Ohio have the lowest property taxes. The property tax rates in these states are usually low, both per person and as a share of income. They also avoid taxes that make things unfair, like taxes on estates, gifts, inheritances, and other forms of wealth. Connecticut, New York, Vermont, Maine, Massachusetts, New Jersey, and Illinois do not do well on the property tax part of the score. Most of the time, these states have high property tax rates and a number of taxes based on how much money someone has.

The Index's property tax part is made up of two subindices with equal weights that measure the economic effects of both rates and bases. The rate subindex is made up of both property taxes and capital stock taxes. Property taxes are tracked both per person and as a percentage of personal income. The base part is made up of dummy variables that say whether or not each state has taxes on inheritance, estate, gift, inventory, intangible property, and other types of income.
Table 6. Property Tax Component of the State Business Tax Climate Index (2014–2023)
  Prior Year Ranks 2022 2023 2022-2023 Change
State 2014 2015 2016 2017 2018 2019 2020 2021 Rank Score Rank Score Rank Score
Alabama 13 13 21 17 16 19 19 21 20 5.31 18 5.33 2 0.02
Alaska 29 30 19 25 40 23 25 25 26 5.18 26 5.17 0 -0.01
Arizona 11 11 12 11 11 11 11 10 11 5.68 11 5.76 0 0.08
Arkansas 23 24 27 24 24 27 27 28 29 5.12 27 5.17 2 0.05
California 16 16 13 14 14 13 15 14 14 5.44 19 5.33 -5 -0.11
Colorado 39 39 34 33 32 33 33 33 34 4.70 36 4.51 -2 -0.19
Connecticut 50 50 50 50 50 50 50 50 50 2.32 50 2.27 0 -0.05
Delaware 5 5 5 7 7 4 4 4 4 6.31 4 6.28 0 -0.03
Florida 22 23 17 13 12 12 12 12 12 5.58 12 5.55 0 -0.03
Georgia 28 28 25 26 27 30 31 27 27 5.15 28 5.11 -1 -0.04
Hawaii 20 20 16 18 19 22 28 30 31 5.00 32 4.86 -1 -0.14
Idaho 2 2 2 2 2 3 3 3 3 6.47 3 6.45 0 -0.02
Illinois 45 45 47 46 47 45 44 45 45 3.87 44 3.96 1 0.09
Indiana 3 3 3 3 3 2 2 2 1 6.51 2 6.46 -1 -0.05
Iowa 37 37 38 39 37 38 38 38 39 4.35 40 4.30 -1 -0.05
Kansas 26 26 29 30 30 31 18 19 19 5.35 17 5.35 2 0.00
Kentucky 17 17 23 22 20 24 23 24 24 5.20 24 5.23 0 0.03
Louisiana 19 19 18 27 22 28 29 26 25 5.19 23 5.26 2 0.07
Maine 38 38 39 40 39 40 40 40 41 4.24 47 3.72 -6 -0.52
Maryland 41 41 41 41 42 41 41 43 43 4.12 42 4.15 1 0.03
Massachusetts 44 44 45 45 45 46 45 46 46 3.73 46 3.81 0 0.08
Michigan 27 27 28 28 26 26 26 22 23 5.22 25 5.22 -2 0.00
Minnesota 30 31 32 32 31 32 32 32 32 4.93 31 4.91 1 -0.02
Mississippi 34 34 37 37 36 37 37 37 38 4.43 37 4.45 1 0.02
Missouri 12 12 14 10 9 9 9 8 7 5.99 7 6.03 0 0.04
Montana 15 15 22 19 28 20 21 20 22 5.23 21 5.31 1 0.08
Nebraska 36 36 35 38 38 39 39 41 40 4.28 39 4.34 1 0.06
Nevada 7 7 7 6 6 5 6 5 5 6.17 5 6.19 0 0.02
New Hampshire 43 43 44 44 44 47 46 47 47 3.70 43 4.01 4 0.31
New Jersey 48 48 48 47 49 44 47 44 44 3.87 45 3.87 -1 0.00
New Mexico 1 1 1 1 1 1 1 1 2 6.50 1 6.51 1 0.01
New York 47 47 46 48 46 48 48 49 49 2.89 49 2.83 0 -0.06
North Carolina 10 10 26 29 29 14 13 13 13 5.52 13 5.53 0 0.01
North Dakota 4 4 4 4 4 6 7 11 10 5.70 9 5.91 1 0.21
Ohio 8 8 6 5 5 7 5 6 6 6.12 6 6.13 0 0.01
Oklahoma 21 22 24 21 21 29 30 31 30 5.06 30 5.02 0 -0.04
Oregon 18 18 11 16 17 16 20 16 17 5.37 20 5.31 -3 -0.06
Pennsylvania 32 32 30 15 15 17 16 15 15 5.43 16 5.46 -1 0.03
Rhode Island 46 46 43 43 43 42 42 42 42 4.19 41 4.28 1 0.09
South Carolina 35 35 36 36 35 36 35 35 36 4.60 35 4.60 1 0.00
South Dakota 9 9 10 12 13 15 14 23 18 5.36 14 5.53 4 0.17
Tennessee 40 40 40 35 34 35 34 34 33 4.73 33 4.76 0 0.03
Texas 33 33 33 34 33 34 36 36 37 4.47 38 4.35 -1 -0.12
Utah 6 6 8 8 8 8 8 7 8 5.98 8 5.94 0 -0.04
Vermont 49 49 49 49 48 49 49 48 48 3.24 48 3.23 0 -0.01
Virginia 24 25 20 23 23 25 24 29 28 5.14 29 5.11 -1 -0.03
Washington 14 14 15 20 18 18 17 18 21 5.27 22 5.30 -1 0.03
West Virginia 25 21 9 9 10 10 10 9 9 5.77 10 5.80 -1 0.03
Wisconsin 31 29 31 31 25 21 22 17 16 5.40 15 5.47 1 0.07
Wyoming 42 42 42 42 41 43 43 39 35 4.61 34 4.60 1 -0.01
District of Columbia 46 50 40 47 48 48 48 49 49 2.95 49 2.84 0 -0.11

Note: A rank of 1 is best, 50 is worst. All scores are for fiscal years. DC’s score and rank do not affect other states.
Source: Tax Foundation.

Property Tax Rate

The property tax rate subindex is made up of property tax collections per capita (40 percent of the subindex score), property tax collections as a part of personal income (40 percent of the subindex score), and capital stock taxes (20 percent of the subindex score). Tax collections are given a lot of weight because they are important to businesses and people and because they are getting bigger and more visible to all users. Both are included so that we can get a better idea of how much each state gathers compared to its population and income. The effective rate tells taxpayers how much of their income goes to property taxes. The per capita number tells them how much they pay in property taxes compared to people in other states.

Even though these measures aren't perfect—it would be better to have effective tax rates on personal and real property for both companies and individuals—they are the best ones we have because property tax collections make it hard to get good data. A lot of property taxes are collected at the city level, so there are a lot of different jurisdictions. Because there are so many different places, it's almost hard to gather data. The few studies that have been done on this topic have looked at specific towns or cities instead of the whole state. So, the Census Bureau is the best place to get information about property taxes because it can put all the information together and solve problems with how things are defined.

States with low effective tax rates and low tax collections per person are more likely to encourage growth than states with high effective tax rates and high tax collections.

How Much Property Tax Is Collected Per Person. The Census Bureau gives the number of people in each state, which is then divided by the amount of property taxes received in that state. New Jersey ($3,513), New Hampshire ($3,246), Connecticut ($3,215), New York ($3,180), and Vermont ($2,938) take the most property taxes per person. Alabama ($620), Arkansas ($788), Oklahoma ($826), Tennessee ($834), and Kentucky ($873) are the places that get the least money per person.

The real tax rate on property. The percentage of personal income that property taxes take up in each state is found by dividing the total amount of property taxes collected by the Census Bureau by the amount of personal income in each state. This gives an effective amount of property tax. Maine (5.21 percent), Vermont (4.82 percent), New Jersey (4.80 percent), New Hampshire (4.79 percent), New York (4.36 percent), and Connecticut (4.20 percent) have the highest effective rates and, therefore, the worst scores. Alabama (1.37 percent), Tennessee (1.61 percent), Arkansas (1.69 percent), Oklahoma (1.75 percent), Louisiana (1.80 percent), and Delaware (1.86 percent) do well because their actual tax rates are low.

Rate of tax on capital stock. Capital stock taxes, also known as franchise taxes, are charged on a company's wealth, which is usually measured by its net worth. They are often added to company income taxes, which means that many corporations have to pay and follow two sets of rules. When a company is having trouble with money, it must use its limited cash flow to pay its capital stock tax. The subindex takes into account three factors when figuring out capital stock taxes: the capital stock tax rate, the maximum payment, and whether a capital stock tax is placed on top of a corporate income tax or if the business is only responsible for the higher of the two. The subindex for the capital stock tax is 20% of the subindex for the total rate.

This variable shows how much tax the 16 states that have a capital stock tax charge. Capital stock taxes hurt the economy, and lawmakers have realized this. As a result, a few states are cutting or getting rid of them. Kansas's tax was completely phased out in 2011. Rhode Island and West Virginia got rid of their capital stock taxes completely on January 1, 2015, and Pennsylvania did the same thing in 2016. The phase-out of New York's capital stock tax ended on January 1, 2021. However, the legislature chose to temporarily bring the tax back because of budget worries caused by the coronavirus. In a similar way, Illinois had planned to start a phase-out in 2020 and finish it in 2024. After two years, Illinois changed its mind about phasing out the exemption and instead chose to keep it at $1,000. By January 1, 2024, Connecticut wants to get rid of its tax. Arkansas (0.30 percent), Louisiana (0.275 percent), Massachusetts (0.26 percent), Connecticut (0.21 percent), Tennessee (0.25 percent), and New York (0.1875 percent) have the highest capital stock tax rates.

The most you can pay in capital stock tax. The capital stock tax hurts the economy in eight states, but this is lessened by putting a limit on how much can be paid in capital stock tax. These states are Alabama, Connecticut, Delaware, Georgia, Illinois, Nebraska, New York, and Oklahoma. They get the best score on this variable among the states that have a capital stock tax.

Capital Stock Tax vs. Income Tax on Corporations. Some states lessen the bad effects of the capital stock tax on the economy by letting companies pay whichever tax is higher: the capital stock tax or the corporate tax. This part of the law is credited to these states: Connecticut, Massachusetts, and New York. In this subindex, states that don't have a capital stock tax get the best scores, while states that make companies pay both get the worst scores.

Property Tax Base

This subindex is composed of dummy variables listing the different types of property taxes each state levies. Seven taxes are included and each is equally weighted. Delaware, Idaho, Indiana, Ohio, Alaska, New Mexico, North Dakota, Nevada, New Hampshire, New Jersey, North Carolina, and Pennsylvania score the best because they each only levy one of the seven taxes. Connecticut, Maryland, and Kentucky receive the worst scores because they impose many of these taxes.
Business Tangible Property Tax. This variable rewards states which remove, or substantially remove, business tangible personal property from their tax base. Taxes on tangible personal property, meaning property that can be touched or moved (as opposed to real estate), are a source of tax complexity and nonneutrality, incentivizing firms to change their investment decisions and relocate to avoid the tax. Eight states (Delaware, Hawaii, Illinois, Iowa, New Jersey, New York, Ohio, and Pennsylvania) exempt all tangible personal property from taxation, while another four states (Minnesota, New Hampshire, North Dakota, and South Dakota) exempt most such property from taxation except for select industries that are centrally assessed.
Intangible Property Tax. This dummy variable gives low scores to those states that impose taxes on intangible personal property. Intangible personal property includes stocks, bonds, and other intangibles such as trademarks. This tax can be highly detrimental to businesses that hold large amounts of their own or other companies’ stock and that have valuable trademarks. Eight states levy this tax in various degrees: Alabama, Iowa, Kentucky, Louisiana, Mississippi, South Dakota, Tennessee, and Texas.
Inventory Tax. Levied on the value of a company’s inventory, the inventory tax is especially harmful to large retail stores and other businesses that store large amounts of merchandise. Inventory taxes are highly distortionary, because they force companies to make decisions about production that are not entirely based on economic principles but rather on how to pay the least amount of tax on goods produced. Inventory taxes also create strong incentives for companies to locate inventory in states where they can avoid these harmful taxes. Fourteen states levy some form of inventory tax.
Split Roll Taxation. In some states, different classes of property—like residential, commercial, industrial, and agricultural property—face distinct tax burdens, either because they are taxed at different rates or are exposed to different assessment ratios. When such distinctions exist, the state is said to have a split (rather than unified) property tax roll. The Index assesses whether states utilize split roll taxation, which tends to discriminate against business property, and what ratio exists between commercial and residential property taxation.
Property Tax Limitation Regimes. Most states limit the degree to which localities can raise property taxes, but these property tax limitation regimes vary dramatically. Broadly speaking, there are three types of property tax limitations. Assessment limits restrict the rate at which a given property’s assessed value can increase each year. (It often, but not always, resets upon sale or change of use, and sometimes resets when substantial improvements are made.) Rate limits, as the name implies, either cap the allowable rate or restrict the amount by which the rate can be raised in a given year. Finally, levy limits impose a restriction on the growth of total collections (excluding those from new construction), implementing or necessitating rate reductions if revenues exceed the allowable growth rate. Most limitation regimes permit voter overrides. The Index penalizes states for imposing assessment limitations, which distort property taxation, leading to similar properties facing highly disparate effective rates of taxation and influencing decisions about property utilization. It also rewards states for adopting either a rate or levy limit, or both.
Asset Transfer Taxes (Estate, Inheritance, and Gift Taxes). Four taxes levied on the transfer of assets are part of the property tax base. These taxes, levied in addition to the federal estate tax, all increase the cost and complexity of transferring wealth and hurt a state’s business climate. These harmful effects can be particularly acute in the case of small, family-owned businesses if they do not have the liquid assets necessary to pay the estate’s tax liability. The four taxes are real estate transfer taxes, estate taxes, inheritance taxes, and gift taxes. Thirty-five states and the District of Columbia levy taxes on the transfer of real estate, adding to the cost of purchasing real property and increasing the complexity of real estate transactions. This tax is harmful to businesses that transfer real property often.
The federal Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) lowered the federal estate tax rate through 2009 and eliminated it entirely in 2010. Prior to 2001, most states levied an estate tax that piggybacked on the federal system, because the federal tax code allowed individuals to take a dollar-for-dollar tax credit for state estate taxes paid. In other words, states essentially received free tax collections from the estate tax, and individuals did not object because their total tax liability was unchanged. EGTRRA eliminated this dollar-for-dollar credit system, replacing it with a tax deduction.
Consequently, over the past decade, some states enacted their own estate tax while others repealed their estate taxes. Some states have provisions reintroducing the estate tax if the federal dollar-for-dollar credit system is revived. This would have happened in 2011, as EGTRRA expired and the federal estate tax returned to pre-2001 levels. However, in late 2010, Congress reenacted the estate tax for 2011 and 2012 but with higher exemptions and a lower rate than pre-2001 law and maintained the deduction for state estate taxes. The tax reform law of 2017 raised the federal exemption still further. Thirty-eight states receive a high score for either (1) remaining coupled to the federal credit and allowing their state estate tax to expire or (2) not enacting their own estate tax, including two which repealed their estate tax this year. Twelve states and the District of Columbia have maintained an estate tax either by linking their tax to the pre-EGTRRA credit or by creating their own stand-alone system. These states score poorly.
Each year, some businesses, especially those that have not spent a sufficient sum on estate tax planning and on large insurance policies, find themselves unable to pay their estate taxes, either federal or state. Usually they are small- to medium-sized family-owned businesses where the death of the owner occasions a surprisingly large tax liability.
Inheritance taxes are similar to estate taxes, but they are levied on the heir of an estate instead of on the estate itself. Therefore, a person could inherit a family-owned company from his or her parents and be forced to downsize it, or sell part or all of it, in order to pay the heir’s inheritance tax. Six states have inheritance taxes and are punished in the Index, because the inheritance tax causes economic distortions. Maryland has both an estate tax and an inheritance tax, the only state to impose both after New Jersey completed the repeal of its estate tax.
Connecticut is the only state with a gift tax, and it scores poorly. Gift taxes are designed to stop individuals’ attempts to avoid the estate tax by giving their estates away before they die. Gift taxes have a negative impact on a state’s business tax climate because they also heavily impact individuals who have sole proprietorships, S corporations, and LLCs.

Unemployment Insurance Taxes

Unemployment insurance (UI) is a social insurance program jointly operated by the federal and state governments. Taxes are paid by employers into the UI program to finance benefits for workers recently unemployed. Compared to the other major taxes assessed in the State Business Tax Climate Index, UI taxes are much less well-known. Every state has one, and all 50 of them are complex, variable-rate systems that impose different rates on different industries and different bases depending upon such factors as the health of the state’s UI trust fund.
One of the worst aspects of the UI tax system is that financially troubled businesses, for which layoffs may be a matter of survival, actually pay higher marginal rates as they are forced into higher tax rate schedules. In the academic literature, this has long been called the “shut-down effect” of UI taxes: failing businesses face climbing UI taxes, with the result that they fail sooner.
The unemployment insurance tax component of the Index consists of two equally weighted subindices, one that measures each state’s rate structure and one that focuses on the tax base. Unemployment insurance taxes comprise 9.8 percent of a state’s final Index score.
Overall, the states with the least damaging UI taxes are Oklahoma, Florida, Delaware, Louisiana, Mississippi, and Michigan. Comparatively speaking, these states have rate structures with lower minimum and maximum rates and a wage base at the federal level. In addition, they have simpler experience formulas and charging methods, and they have not complicated their systems with benefit add-ons and surtaxes.
Conversely, the states with the worst UI taxes are Massachusetts, Rhode Island, Kentucky, Idaho, and Maryland. These states tend to have rate structures with high minimum and maximum rates and wage bases above the federal level. They also tend to feature more complicated experience formulas and charging methods, and have added benefits and surtaxes to their systems.
Table 7. Unemployment Insurance Tax Component of the State Business Tax Climate Index (2014–2023)
  Prior Year Ranks 2022 2023 2022-2023 Change
State 2014 2015 2016 2017 2018 2019 2020 2021 Rank Score Rank Score Rank Score
Alabama 23 25 26 14 11 12 18 15 18 5.16 19 5.15 -1 -0.01
Alaska 26 24 22 29 24 34 45 44 44 4.31 44 4.33 0 0.02
Arizona 2 4 5 11 15 13 6 8 14 5.50 14 5.47 0 -0.03
Arkansas 28 40 43 30 31 33 23 23 20 5.13 20 5.14 0 0.01
California 14 14 13 16 13 17 22 21 24 5.07 24 5.03 0 -0.04
Colorado 38 35 34 42 34 39 42 40 40 4.52 42 4.45 -2 -0.07
Connecticut 21 20 20 21 19 23 21 22 23 5.09 23 5.07 0 -0.02
Delaware 1 3 3 3 3 3 3 3 2 5.96 2 5.99 0 0.03
Florida 4 2 2 2 2 2 2 2 4 5.87 3 5.92 1 0.05
Georgia 39 39 39 35 37 37 38 38 37 4.69 35 4.70 2 0.01
Hawaii 32 28 24 24 26 26 28 25 31 4.88 30 4.90 1 0.02
Idaho 47 46 45 46 45 47 47 47 46 4.05 47 4.04 -1 -0.01
Illinois 41 37 37 38 41 41 39 42 42 4.50 43 4.41 -1 -0.09
Indiana 10 9 15 10 10 11 25 27 26 4.93 27 4.93 -1 0.00
Iowa 33 33 35 34 33 32 34 36 34 4.80 33 4.81 1 0.01
Kansas 7 8 11 12 12 15 14 14 16 5.41 15 5.42 1 0.01
Kentucky 46 45 46 48 47 46 48 48 48 3.87 48 4.01 0 0.14
Louisiana 5 5 4 9 4 4 4 4 6 5.73 6 5.73 0 0.00
Maine 37 42 41 44 43 24 31 32 35 4.79 38 4.60 -3 -0.19
Maryland 31 21 28 26 23 28 32 33 47 4.03 41 4.46 6 0.43
Massachusetts 48 48 47 49 49 50 50 50 50 3.41 50 3.32 0 -0.09
Michigan 44 47 48 47 48 48 17 18 7 5.66 8 5.66 -1 0.00
Minnesota 34 29 29 28 36 25 33 31 28 4.90 34 4.80 -6 -0.10
Mississippi 8 7 8 5 5 5 5 5 5 5.79 5 5.80 0 0.01
Missouri 13 13 12 7 7 8 9 7 3 5.91 4 5.92 -1 0.01
Montana 20 18 18 19 20 21 20 20 19 5.15 18 5.16 1 0.01
Nebraska 12 12 10 8 9 9 11 11 11 5.56 11 5.56 0 0.00
Nevada 43 43 42 43 44 44 46 46 45 4.19 46 4.19 -1 0.00
New Hampshire 45 44 44 41 42 43 44 43 43 4.32 45 4.32 -2 0.00
New Jersey 30 32 32 25 35 31 30 30 33 4.86 32 4.85 1 -0.01
New Mexico 11 10 7 17 16 10 8 9 8 5.64 9 5.65 -1 0.01
New York 24 31 33 32 29 30 37 37 36 4.76 40 4.50 -4 -0.26
North Carolina 9 11 9 6 6 7 10 10 10 5.58 10 5.59 0 0.01
North Dakota 16 16 16 15 14 14 13 13 9 5.63 7 5.68 2 0.05
Ohio 6 6 6 4 8 6 7 6 13 5.54 13 5.52 0 -0.02
Oklahoma 3 1 1 1 1 1 1 1 1 6.05 1 6.07 0 0.02
Oregon 29 30 27 33 30 36 35 35 39 4.62 36 4.69 3 0.07
Pennsylvania 50 50 50 45 50 45 41 39 22 5.09 22 5.08 0 -0.01
Rhode Island 49 49 49 50 46 49 49 49 49 3.76 49 3.77 0 0.01
South Carolina 35 36 31 37 28 27 26 24 29 4.90 29 4.91 0 0.01
South Dakota 40 41 40 40 38 38 43 41 38 4.67 37 4.68 1 0.01
Tennessee 25 26 25 23 22 22 24 26 21 5.09 21 5.10 0 0.01
Texas 15 15 14 13 25 18 12 12 12 5.55 12 5.55 0 0.00
Utah 19 22 19 22 21 16 15 17 17 5.39 16 5.40 1 0.01
Vermont 17 17 17 20 18 20 16 16 15 5.48 17 5.36 -2 -0.12
Virginia 42 38 38 39 40 42 40 45 41 4.52 39 4.52 2 0.00
Washington 18 19 21 18 17 19 19 19 25 5.02 25 5.02 0 0.00
West Virginia 22 23 23 27 27 29 29 28 27 4.93 26 4.95 1 0.02
Wisconsin 27 27 36 36 39 40 36 34 30 4.88 31 4.90 -1 0.02
Wyoming 36 34 30 31 32 35 27 29 32 4.86 28 4.92 4 0.06
District of Columbia 25 27 27 27 29 32 34 36 39 4.66 38 4.64 1 -0.02

Note: A rank of 1 is best, 50 is worst. All scores are for fiscal years. DC’s score and rank do not affect other states.
Source: Tax Foundation.

Unemployment Insurance Tax Rate

UI tax rates in each state are based on a schedule of rates ranging from a minimum rate to a maximum rate. The rate for any particular business is dependent upon the business’s experience rating: businesses with the best experience ratings will pay the lowest possible rate on the schedule while those with the worst ratings pay the highest. The rate is applied to a taxable wage base (a predetermined fraction of an employee’s wage) to determine UI tax liability.
Multiple rates and rate schedules can affect neutrality as states attempt to balance the dual UI objectives of spreading the cost of unemployment to all employers and ensuring high-turnover employers pay more.
Overall, the states with the best score on this rate subindex are Florida, Nebraska, Louisiana, Missouri, South Carolina, Mississippi, and Georgia. Generally, these states have low minimum and maximum tax rates on each schedule and a wage base at or near the federal level. The states with the worst scores are New York, Massachusetts, Washington, Rhode Island, Alaska, and Oregon.
The subindex gives equal weight to two factors: the actual rate schedules in effect in the most recent year, and the statutory rate schedules that can potentially be implemented at any time depending on the state of the economy and the UI fund.

Tax Rates Imposed in the Most Recent Year

Minimum Tax Rate. States with lower minimum rates score better. The minimum rates in effect in the most recent year range from zero percent (in Iowa, Missouri, Nebraska, South Dakota, and Wisconsin) to 2.10 percent (in New York).
Maximum Tax Rate. States with lower maximum rates score better. The maximum rates in effect in the most recent year range from 5.4 percent (in Alaska, Florida, Hawaii, Idaho, Nebraska, Nevada, and Oregon) to 20.93 percent (in Arizona).
Taxable Wage Base. California, Florida, and Tennessee receive the best scores in this variable with a taxable wage base of $7,000—in line with the federal taxable wage base. The state with the highest taxable bases and, thus, the worst score on this variable, is Washington ($62,500).

Potential Rates

Due to the effect of business and seasonal cycles on UI funds, states will sometimes change UI tax rate schedules. When UI trust funds are flush, states will trend toward their lower rate schedules (“most favorable schedules”); however, when UI trust funds are low, states will trend toward their higher rate schedules (“least favorable schedules”).
Most Favorable Schedule: Minimum Tax Rate. States receive the best score in this variable with a minimum tax rate of zero, which they implement when unemployment is low and the UI fund is flush. The minimum rate on the most favorable schedule ranges from zero in 22 states to 1.0 percent in Alaska.
Most Favorable Schedule: Maximum Tax Rate. The lowest maximum rate of 5.4 percent is imposed by 22 states and the District of Columbia. The state with the highest maximum tax rate and, thus, the worst maximum tax score, is Wisconsin (10.7 percent).
Least Favorable Schedule: Minimum Tax Rate. Thirteen states receive the best score on this variable with a minimum tax rate of zero percent. The state with the highest minimum tax rate and, thus, the worst minimum tax score, is Hawaii (2.4 percent).
Least Favorable Schedule: Maximum Tax Rate. Twelve states receive the best score in this variable with a comparatively low maximum tax rate of 5.4 percent. The state with the highest maximum tax rate and, thus, the worst maximum tax score, is Massachusetts (18.55 percent).

Unemployment Insurance Tax Base

The UI base subindex scores states on how they determine which businesses should pay the UI tax and how much, as well as other UI-related taxes for which businesses may also be liable.
The states that receive the best scores on this subindex are Oklahoma, Delaware, Vermont, New Mexico, and North Dakota. In general, these states have relatively simple experience formulas, they exclude more factors from the charging method, and they enforce fewer surtaxes.
States that receive the worst scores are Virginia, Nevada, Idaho, Maine, and Georgia. In general, they have more complicated experience formulas, exclude fewer factors from the charging method, and have complicated their systems with add-ons and surtaxes. The three factors considered in this subindex are experience rating formulas (40 percent of the subindex score), charging methods (40 percent of the subindex score), and a host of smaller factors aggregated into one variable (20 percent of the subindex score).
Experience Rating Formula. A business’s experience rating formula determines the rate the firm must pay—whether it will lean toward the minimum rate or maximum rate of the particular rate schedule in effect in the state at that time.
There are four basic experience formulas: contribution, benefit, payroll, and state experience. The first three experience formulas–contribution, benefit, and payroll–are based solely on the business’s experience and are therefore nonneutral by design.[35] However, the final variable–state experience–is a positive mitigating factor because it is based on statewide experience. In other words, the state experience is not tied to the experience of any one business; therefore, it is a more neutral factor. This subindex penalizes states that depend on the contribution, benefit, and payroll experience variables while rewarding states with the state experience variable.
Charging Methods and Benefits Excluded from Charging. A business’s experience rating will vary depending on which charging method the state government uses. When a former employee applies for unemployment benefits, the benefits paid to the employee must be charged to a previous employer. There are three basic charging methods:
Charging Most Recent or Principal Employer: Nine states charge all the benefits to one employer, usually the most recent. Charging Base-Period Employers in Inverse Chronological Order: Six states charge all base-period employers in inverse chronological order. This means that all employers within a base period of time (usually the last year, sometimes longer) will have the benefits charged against them, with the most recent employer being charged the most. Charging in Proportion to Base-Period Wages: Thirty-four states and the District of Columbia charge in proportion to base-period wages. This means that all employers within a base period of time (usually the last year, sometimes longer) will have the benefits charged against them in proportion to the wages they paid.
None of these charging methods could be called neutral, but at the margin, charging the most recent or principal employer is the least neutral because the business faced with the necessity of laying off employees knows it will bear the full benefit charge. The most neutral of the three is the “charging in proportion to base-period wages” since there is a higher probability of sharing the benefit charges with previous employers.
As a result, the states that charge in proportion to base-period wages receive the best score. The states that charge the most recent or principal employer receive the worst score. The states that charge base-period employers in inverse chronological order receive a median score.
Many states also recognize that certain benefit costs should not be charged to employers, especially if the separation is beyond the employer’s control. Therefore, this subindex also accounts for six types of exclusions from benefit charges:
Benefit award reversed Reimbursements on combined wage claims Voluntary leaving Discharge for misconduct Refusal of suitable work Continues to work for employer on part-time basis
States are rewarded for each of these exclusions because they nudge a UI system toward neutrality. For instance, if benefit charges were levied for employees who voluntarily quit, then industries with high turnover rates, such as retail, would be hit disproportionately harder. States that receive the best scores in this category are Connecticut, Delaware, Louisiana, Missouri, Ohio, and Vermont. On the other hand, the states that receive the worst scores are Virginia, Nevada, Georgia, Idaho, Kentucky, Maine, Illinois, New Hampshire, Rhode Island, and South Carolina. Most states charge the most recent or principal employer and forbid most benefit exclusions.
Solvency Tax. These taxes are levied on employers when a state’s unemployment fund falls below some defined level. Twenty-seven states have a solvency tax on the books, though they fall under different names, such as solvency adjustment tax (Alaska), supplemental assessment tax (Delaware), subsidiary tax (New York), and fund balance factor (Virginia).
Taxes for Socialized Costs or Negative Balance Employer. These are levied on employers when the state desires to recover benefit costs above and beyond the UI tax collections based on the normal experience rating process. Nine states have these taxes on the books, though they fall under different names, such as shared cost assessment tax (Alabama) and social cost factor tax (Washington).
Loan and Interest Repayment Surtaxes. Levied on employers when a loan is taken from the federal government or when bonds are sold to pay for benefit costs, these taxes are of two general types. The first is a tax to pay off the federal loan or bond issue. The second is a tax to pay the interest on the federal loan or bond issue. States are not allowed to pay interest costs directly from the state’s unemployment trust fund. Twenty-eight states and the District of Columbia have these taxes on the books, though they fall under several names, such as advance interest tax and bond assessment tax (Colorado) and temporary emergency assessment tax (Delaware).
Reserve Taxes. Reserve taxes are levied on employers, to be deposited in a reserve fund separate from the unemployment trust fund. Since the fund is separate, the interest earned on it is often used to create other funds for purposes such as job training and paying the costs of the reserve tax’s collection. Four states have these taxes on the books: Idaho and Iowa (reserve tax), Nebraska (state UI tax), and North Carolina (reserve fund tax).
Surtaxes for UI Administration or Non-UI Purposes. Twenty-nine states and the District of Columbia levy surtaxes on employers, usually to fund administration but sometimes for job training or special improvements in technology. They are often deposited in a fund outside of the state’s unemployment fund. Some of the names they go by are the state training and employment program (Arkansas), reemployment service fund tax (New York), wage security tax (Oregon), and investment in South Dakota future fee (South Dakota).
Temporary Disability Insurance (TDI). A handful of states–California, Hawaii, New Jersey, and New York–have established a temporary disability insurance (TDI) program that augments the UI program by extending benefits to those unable to work because of sickness or injury. No separate tax funds these programs; the money comes right out of the states’ unemployment funds. Because the balance of the funds triggers various taxes, the TDIs are included as a negative factor in the calculation of this subindex.
Voluntary Contributions. Twenty-six states allow businesses to make voluntary contributions to the unemployment trust fund. In most cases, these contributions are rewarded with a lower rate schedule, often saving the business more money in taxes than was paid through the contribution. The Index rewards states that allow voluntary contributions because firms are able to pay when they can best afford to instead of when they are struggling. This provision helps to mitigate the nonneutralities of the UI tax.
Time Period to Qualify for Experience Rating. Newly formed businesses, naturally, do not qualify for an experience rating because they have no significant employment history on which to base the rating. Federal rules stipulate that states can levy a “new employer” rate for one to three years, but no less than one year. From a neutrality perspective, however, this new employer rate is nonneutral in almost all cases since the rate is higher than the lowest rate schedule. The longer this rate is in effect, the worse the nonneutrality. As such, the Index rewards states with the minimum one year required to earn an experience rating and penalizes states that require the full three years.