At least sales and unemployment insurance taxes are pretty good, allowing the state to nudge up a spot from last year. Continued rate relief in Nebraska yielded a ranking improvement of four places overall, from 28th to 24th, as individual and corporate income tax rates both declined substantially to 5.84 percent. These rate reductions resulted in a seven-place improvement on the corporate component, from 27th to 20th, and an improvement of three places, from 29th to 26th, on the individual income tax component of the Index. Iowa improved two places overall, to 20th, as the state continues to implement meaningful reforms. The corporate income tax phased down from 8.3 to 7.1 percent, resulting in an improvement of five places on the corporate component of the Index. A reduction of the top individual income tax rate from 6.0 to 5.7 percent, combined with a reduction in brackets from four to three, did not yield an improvement in the individual component rank since other states made larger changes.
- Consumption taxes that are levied instead at each stage of production are known as value-added taxes (VAT) and are popular internationally.
- Most of Nevada’s rankings are holding steady, with the exception of property tax ranking stepping from 6th to 5th.
- Just because a state has a great tax environment, however, does not always equate to a strong and growing economy.
- Other states with comparatively low top corporate tax rates are Utah (4.55 percent), Arizona and Indiana (both at 4.9 percent), and Kentucky, Mississippi, and South Carolina (all at 5 percent).
- Stock appreciation becomes taxable realized capital gains when the stock is sold by the holder.
Corporate Tax Base
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. Pennsylvania scores the best in this variable by having only one tax bracket (that is, a flat tax with no standard deduction). States with only two brackets (that is, flat taxes with a standard deduction) are Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, New Hampshire, North Carolina, Tennessee, and Utah. On the other end of the spectrum, Hawaii scores worst with 13 brackets, followed by California with 11 brackets, and Iowa and Missouri with nine brackets.
Notable Ranking Changes in this Year’s Index
North Dakota reduced its top marginal individual income tax rate from 2.9 to 2.5 percent and established a wide zero-tax bracket. The state now has the lowest top marginal rate among those states that tax wage and salary income. As a result, North Dakota became more competitive on the individual income tax component and improved seven places, from 28th to 21st. In June 2023, Louisiana lawmakers passed legislation that would have phased out the state’s franchise tax, which is a capital stock tax that disincentivizes investment in the state.
Tobacco, spirits, and beer excise taxes can discourage in-state consumption and encourage consumers to seek lower prices in neighboring jurisdictions (Moody and Warcholik, 2004). This impacts a wide swath of retail outlets, such as convenience stores, that move large volumes of tobacco and beer products. The problem is exacerbated for those retailers located near the border of states with lower excise taxes as consumers move their shopping out of state—referred to as cross-border shopping.
Individual Income Tax Rate
Twenty states and the District of Columbia have marriage penalties built into their income tax brackets. Delaware, Nevada, Ohio, Oregon, Tennessee, and Washington score the worst, because their gross receipts taxes do not offer full deductions for either the cost of goods sold or employee compensation. Texas offers a deduction for either the cost of goods sold or employee compensation 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 assessed at the local level and not levied uniformly across the state.
(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 2021 state business tax climate index 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. 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. The new edition of the Index neither rewards nor penalizes rate limitations, which often have very little effect. Some states mitigate the negative economic impact of the capital stock tax by allowing corporations to pay the higher of their capital stock tax or their corporate tax. These states (Connecticut, Massachusetts, and New York) are given credit for this provision.
The income tax rates are at most 6 percent for single filers making over $50,000 per year and married couples making over $100,000 per year. As with Alabama, property taxes are relatively low at 0.51 percent of the home value. Louisiana ranks 38th for state and local sales tax at a combined rate of 9.55 percent. The individual income tax base subindex takes into account measures enacted to prevent double taxation, whether the code is indexed for inflation, and how the tax code treats married couples compared to singles. States that score well protect married couples from being taxed more severely than if they had filed as two single individuals. They also protect taxpayers from double taxation by recognizing S corporations under the individual tax code and indexing their brackets, exemptions, and deductions for inflation.
Credit for Taxes Paid
Kansas improved one place on the individual component due to the passage of S.B. 1 in June 2024, which retroactively reduced the top marginal rate from 5.7 to 5.58 percent, consolidated three brackets into two, and increased the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. Taxpayers who take the standard deduction cannot also itemize their deductions; it serves as an alternative., personal exemption, and dependent exemption, among other tax changes. The corporate income tax rate also declined from 7 to 6.5 percent, though this did not improve the state’s rank on the corporate component. In 2024, Georgia transitioned from a graduated individual income tax with a top rate of 5.75 percent to a flat tax structure with a rate of 5.39 percent. As a result of these structural reforms, Georgia moved up six places overall on the Index, including three places on the individual income tax component and two places on the corporate tax component.
- Twenty-nine 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).
- (f) Includes a statewide local tax of 52 cents in Alabama and 53 cents in Georgia.
- This analysis’s accuracy is limited by the extent of the IRS data at the county level, which is particularly limited for OBBBA’s new and narrowly targeted provisions, such as the deduction for tipped income.
North Dakota
Meanwhile, states where the tax base is found to cause an unnecessary drag on economic activity include New Jersey, California, New York, Pennsylvania, Maryland, Connecticut, Arkansas, and Delaware. This variable measures the number of years allowed on a carryback or carryforward of an NOL deduction. The longer the overall time span, the higher the probability that the corporate income tax is being levied on the corporation’s average profitability. Following the federal treatment of NOLs, states entered FY 2025 with more favorable carryforward provisions (allowing carryforwards for up to an unlimited number of years) compared to carryback provisions (limited to a maximum of three years). States score well on the Index if they conform to federal guidelines or offer their own robust system for carryforwards and carrybacks. States that score well on the corporate tax base subindex generally will have few business tax credits, generous carryback and carryforward provisions, ons for net operating losses, conformity to the Internal Revenue Code, and provisions that alleviate double taxation.
These interactions provide a more precise estimate of the total tax burden on different types of firms. Essentially, we now penalize low-rate states if their taxable wage base is significantly higher than the federal level of $7,000. Similarly, we penalize high-rate states, but the size of the penalty increases with the taxable wage base. For example, a state with a maximum UI tax rate of 10 percent and a taxable wage base of $20,000 would perform as well as a state with a maximum UI tax rate of 5.4 percent and a taxable wage base of $37,000. Furthermore, unlike changes to a state’s health-care, transportation, or education systems, which can take decades to implement, changes to the tax code can quickly improve a state’s competitiveness. Wisconsin’s property tax rank improved by five places as a result of AB 245, enacted in June 2023, which eliminated Wisconsin’s business personal property tax beginning with the January 1, 2024, property tax assessment.
Tennessee and New Hampshire tax interest and dividend income but not wage income. Texas and Washington do not tax wage income but don’t receive a perfect score on this component because they apply their gross receipts taxes to LLCs and S corporations, which, in most states, would be taxed under individual income tax codes. Other states that score well on the individual income tax component are Colorado, Illinois, Indiana, Kentucky, Massachusetts, Michigan, North Carolina, and Utah, because they all have a single low tax rate.
