New Jersey, New York and California Have Worst Tax Climates for Business, Tax Foundation Says
September 25, 2009 - 9:38 PMA new study from the non-partisan Tax Foundation shows that New Jersey, New York, and California respectively are the states whose tax structure is the worst for business, a factor the foundation says drives businesses to other, more business-friendly states.
Released last week, the report ranks states based on how “business-friendly” their tax systems are, ranking them based on five different aspects of their tax systems: corporate, individual income, sales, unemployment insurance and property taxes.
Generally, the report found that the best types of tax systems were business-neutral, broad based, and transparent, and that states whose systems most reflected this ideal were the most competitive.
“The ideal tax system, whether at the local, state or federal level, is simple, transparent, stable, neutral to business activity, and pro-growth,” the study found.
Since reality never quite reflects this ideal, the Tax Foundation examined which states’ tax systems caused the least amount of economic distortions.
“In reality, tax-induced economic distortions are a fact of life, and a more realistic goal is to maximize the occasions when people’s economic decisions, whether in business or personal life, are guided by their own judgments, and minimize those cases where economic decisions are micromanaged or even dictated by a tax system,” the report explained.
“Therefore, the most competitive tax systems, and the ones that score best in the SBTCI [State Business Tax Climate Index],” according to the study, “are those that create the fewest economic distortions by enforcing the most simple, pro-growth tax systems characterized by broad bases and low rates.”
The 10 states that most met these criteria, in descending order, were:
-- South Dakota
-- New Hampshire
The one factor they all had in common: They all raised revenue without one or more of the five major taxes the Tax Foundation measured.
“It is obvious that the absence of a major tax is a dominant factor in vaulting these 10 states to the top of the ranking,” said the Tax Foundation. “Property taxes and unemployment insurance taxes are levied in all 50 states, but there are 12 states that do without one or more of the other major taxes: the corporate tax, the individual income tax, or the sales tax.”
In the absence of one of the major taxes, states become more competitive and are better able to attract employers and higher educated job seekers.
“The lesson is simple,” said the report, “a state that raises sufficient revenue without one of the major taxes will, all things being equal, out-compete those states that levy every tax in the state tax collector’s arsenal.”
The states with the worst tax climates, in descending order (New Jersey the worst), were:
-- Rhode Island
-- New York
-- New Jersey
The foundation found that all of the worst states had one or more taxes that were particularly bad for their economies, except for New Jersey, which scored near the bottom in almost every category.
“Most states have at least one major tax area that is hospitable to business and economic growth, and most have at least one punitive tax that makes the state’s tax climate look comparatively bad,” said the study. “For example, California ranks poorly overall, 48th best, despite having the 13th best score on property taxes.
“On the other hand, some states do manage to achieve an almost uniformly good or poor tax climate,” reported the study. “New Jersey has only one tax that scores dead last, property taxes, but its overall ranking is 50th because it has no competitive taxes.”
The report concluded that while every state government must tax, no state government must do so in a way that dampens its economy.
“Every state must raise revenue, and thus every state must tax,” said the report. “No state, however, needs to tax in a way that has significant adverse effects on the business climate. A state needs to continually strive for a tax system that is neutral and pro-growth.”
“A neutral tax system is one in which specific economic activities are not targeted for exemptions or selective taxes. A pro-growth system will avoid excessive taxes and compliance costs on businesses.”
The complete rankings, best to worst, are as follows: