South Dakota has replaced Wyoming as the state with the best “business climate,” while New Jersey remains the worst in the annual State Business Tax Climate Index (SBTCI) conducted by the Tax Foundation, an independent tax advocacy group (see chart below). This ranking provides direction to state lawmakers concerned with keeping their states tax-competitive.
Alert: Keeping competitive in today’s global marketplace is difficult, but there is one factor lawmakers have direct control over: the quality of state tax systems.
The SBTCI, which has been published by the Tax Foundation every year since 2003, ranks states based on the taxes that matter most to businesses and business investment: corporate tax, individual income tax, sales tax, unemployment tax and property tax. The states are scored on these taxes, and the scores are weighted based on the relative importance or impact of the tax to a business.
When assessing which changes to make, the SBTCI reminds lawmakers of two rules:
1. Taxes matter to business. Business taxes affect business decisions, job creation and retention, plant location, competitiveness, the transparency of the tax system and the long-term economy. Most important, taxes diminish profits. If taxes take a larger portion of profits, that cost is passed along to either consumers (through higher prices), workers (through lower wages or fewer jobs), or shareholders (through lower dividends or share value). Thus, a state with lower tax costs will be more attractive to business investment and more likely to experience growth.
2. States do not enact tax changes (increase or cuts) in a vacuum. Every tax law will in some way change a state’s competitive position relative to its immediate neighbors, its geographic 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.
Tip: Find the complete 2009 SBTCI at www.taxfoundation.org/taxdata/topic/90.html.
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