How Tax Friendly is Your State?
State Business Tax Climate Index
by Curtis S. Dubay and Chris Atkins
The Tax Foundation presents the 2007 edition of the State Business Tax Climate Index (SBTCI) as a tool for lawmakers, the media, and individuals alike to gauge how their states’ tax systems compare. Policymakers can then use the SBTCI to pinpoint changes to their tax system that will explicitly improve their state’s standing in relation to competing states.
How much states collect in taxes is critical, but how they take it is also important. In other words, quite apart from whether a state’s total tax burden is higher than in other states, it can enact (and many states do) a set of tax laws that cause great damage to the economy.
The SBTCI is designed to measure the competitiveness of each state’s tax system so lawmakers, the media and the public alike can gauge how their state compares to other states. They can also use the SBTCI to pinpoint specific changes that will increase the competitive standing of their state.
Good state tax systems levy low, flat rates on the broadest bases possible, and they treat all taxpayers the same. Variation in the tax treatment of different industries favors one economic activity or decision over another. The more riddled a tax system is with these politically motivated preferences the less likely it is that business decisions will be made in response to market forces. The SBTCI rewards those states that apply these principles in five important areas of taxation: individual income taxes, major business taxes, sales taxes, unemployment insurance taxes, and taxes on wealth or assets such as property.
The SBTCI places 113 variables into five component indexes that each measure a different sector of a state’s business tax climate. The five component indexes are the Corporate Tax Index, Individual Income Tax Index, Sales Tax Index, Unemployment Tax Index and Property Tax Index. The total score for each state is calculated based on the scores on each of the five component indexes. Using the economic literature as our guide, we designed these five component indexes to score each state’s business tax climate on a scale of zero (worst) to 10 (best). Each component index is devoted to a major area of state taxation and each has two equally weighted sub-indexes, some of which include several categories and variables under them. Overall, there are 10 sub-indexes and 113 variables.
The ten best states in the Tax Foundation’s 2007 State Business Tax Climate Index are as follows:
2. South Dakota
7. New Hampshire
The ten worst states in the Tax Foundation’s 2007 State Business Tax Climate Index are:
47. New York
48. New Jersey
50. Rhode Island
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