States' Business Tax Climate
Richard Higgins, CPA
Focused on You. Dedicated to Your Success.
October 23, 2017

The Tax Foundation’s 2018 State Business Tax Climate Index rates the best and worst states for businesses in the nation for state income tax purposes. The Index is designed to show how well states structure their tax systems, and provides a roadmap for improvement. 

The 10 best states in this year’s Index are:
  • Wyoming
  • South Dakota
  • Alaska
  • Florida
  • Nevada
  • Montana
  • New Hampshire
  • Utah
  • Indiana
  • Oregon

A common factor among many of the top ten states is the nonexistence of a major tax. Although property and unemployment insurance taxes are levied in every state, several states do not have one or more of the major taxes. These include the corporate income tax, individual income tax, or sales tax. 

Wyoming, Nevada, and South Dakota do not levy corporate or individual income taxes. Nevada does, however, impose a gross receipts tax. Alaska does not have individual income or state sales taxes. Florida does not tax individuals on their income. New Hampshire, Montana, and Oregon have no sales tax. 

Two states (Indiana and Utah) listed in the top 10 levy all the major taxes, but do so at lower rates on broad bases. 

The 10 lowest ranked, or worst, states in the 2017 Index are:
  • Rhode Island
  • Louisiana
  • Maryland
  • Connecticut
  • Ohio
  • Minnesota
  • Vermont
  • California
  • New York
  • New Jersey

Common factors in the bottom 10 include complex non-neutral taxes with comparatively high rates. 

It’s not surprising that New Jersey is ranked as the worst state. The Garden State has the reputation of being one of the heaviest taxed states in the nation in nearly every major tax category. It is ranked 50 th in property taxes, 48 th in individual income taxes, 46 th in sales taxes, 42 th in corporate taxes and 36 th in unemployment insurance taxes.

New Jersey once had the lowest estate tax exempt threshold in the nation at $675,000, but thanks to the Transportation Funding Bill signed into law on October 14, 2016, by Governor Chris Christie, the state’s estate tax will be repealed. Up to this point, New Jersey was one of only two states (Maryland) with both an estate and inheritance tax. Effective January 1, 2017, the estate tax exemption increased to $2 million for deaths as of January 1, 2017, and the estate tax will be eliminated as of January 1, 2018. Even so, the Transportation Funding Bill included a provision that increased New Jersey’s gas tax by 23-cents-a-gallon ($0.14.5 to $0.37.1).

New York is ranked 49 th overall. It is also ranked 49 th in individual income taxes, 47 th in property taxes, 43 rd in sales taxes, and 30 th in unemployment insurance taxes. Even so, its corporate tax ranking is very low. New York ranked as the seventh best state in this category. 

Pennsylvania has an overall ranking of 26 th . It is ranked 50 th in unemployment insurance taxes, 44 th in corporate taxes, 33 rd in property taxes, and 21 st in sales tax. The Commonwealth imposes a lower income tax rate than most other states. Ranked 17 th in this category, residents of the Commonwealth are taxed less on their income than their counterparts in 16 other states. 

It is interesting to note that Delaware is ranked 50 th in corporate taxes, followed by Texas (49), Iowa (48), Ohio (47), Washington (46), New Hampshire (45). None of these states are included on the 10 states with the lowest rankings. 

Delaware is ranked first in the sales tax category, followed by New Hampshire (2), Montana (3), Oregon (4) and Alaska (5). Delaware is the only low-ranking state in sales taxes that is not on the top 10-list. Although Delaware ranked third in unemployment insurance taxes, it is 34 th in income taxes and 20 th in property taxes.

While a state’s tax ranking is only one factor in a company’s decision on where it should be located, it is an important one. Most states, including New Jersey, Pennsylvania, and New York, provide incentives to attract and retain businesses. Contact either Rich Higgins, CPA, principal (732-341-3893 ext. 17 or ) or myself (610-828-1900 or ) to learn more. We are always happy to help.
Martin C. McCarthy, CPA, CCIFP
Managing Partner
McCarthy & Company, PC

Disclaimer This alert is for informational purposes only and does not constitute professional advice. Information contained in this communication is not intended or written to be used as tax advice, and cannot be used by the recipient to avoid penalties that may be imposed under the Internal Revenue Code. We strongly advise you to seek professional assistance with respect to your specific issue(s).