10 Best—and Worst—States for Small Business Taxes

Date: January 03, 2014

Mountain West region states soar in new tax-climate rankings

Location, location, location.

When it comes to starting or relocating your small business, it matters—now more than ever, according to the latest State Business Tax Climate Index report from the Tax Foundation, a non-partisan Washington, D.C.-based think tank.

This year, small businesses in Wyoming, South Dakota and Nevada will enjoy the most favorable taxes nationwide, according to the report. That’s because those states levy no corporate or individual income tax.

Meanwhile, California, New Jersey and New York are ranked as the worst places to own or relocate a business due to their complex tax structures with comparatively high rates.

The annual report garners the attention of state legislators and economic-development officials, who are wary of falling behind in an increasingly competitive battle among states for new jobs.

“State lawmakers are right to be concerned about how their states rank in the global competition for jobs and capital, but they need to be more concerned with companies moving from Detroit, Mich., to Dayton, Ohio, rather than from Detroit to New Delhi,” writes the report’s co-authors, Scott Drenkard, an economist at the foundation, and Joseph Henchman, vice president for state projects at the foundation. “This means that state lawmakers must be aware of how their states’ business climates match up to their immediate neighbors and to other states within their regions.”

That states such as Indiana, which recently abolished its inheritance tax, edged out Texas—a perennial powerhouse—from the top 10 this year shows increased economic competition among states. “It’s not that Texas did anything bad,” Drenkard said of the state, which fell one place from last year to No. 11, the first time it’s been out of the top 10 in a decade. “But they have been outpaced by other competitors.”

Elsewhere, Minnesota fell from No. 45 to No. 47, after the Legislature passed an individual income-tax rate hike from 7.85 percent to 9.85 percent, which was retroactive to January 2013. Drenkard noted that North Carolina, a state that ranked No. 44, could rise as high as 17 in the next few years rankings as a comprehensive tax-reform package takes effect.

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