BACKGROUNDPAPER
September 2009, Number 59
2010 State Business Tax Climate Index
By
Kail M. Padgitt
Introduction
The Tax Foundation presents the 2010 StateBusiness Tax Climate Index (hereafter theSBTCI or the Index) as a tool for lawmakers,businesses and individuals alike to gauge how their states’ tax systems compare.Policymakers can use the SBTCI to pinpointchanges to their tax systems that will explicitly improve their states’ standing in relation tocompeting states. American companies often function at acompetitive disadvantage in the globaleconomy. They pay one of the highestcorporate tax rates of any of the industrializedcountries. The top federal rate on corporateincome is 35 percent, and states with punitivetax systems cause companies to be even lesscompetitive globally.The modern market is characterized by mobile capital and labor. Therefore, compa-nies will locate where they have the greatestcompetitive advantage. States with the besttax systems will be the most competitive inattracting new businesses and most effective atgenerating economic and employmentgrowth. Although the market is now global, theDepartment of Labor reports that most mass job relocations are from one U.S. state toanother rather than to an overseas location.
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Certainly job creation is rapid overseas, aspreviously underdeveloped nations enter the world economy. So state lawmakers are rightto be concerned about how their states rank in the global competition for jobs and capital,but they need to be more concerned withcompanies moving from Ithaca, NY, toIndianapolis, IN, than from Ithaca to India.This means that state lawmakers must beaware of how their states’ tax climates matchup to their immediate neighbors and to otherstates within their regions.State lawmakers are always mindful of their states’ business tax climates, but they areoften tempted to lure business with lucrativetax incentives and subsidies instead of broad-based tax reform. This can be a dangerousproposition as a case in Florida illustrates. In July of 2004 Florida lawmakers cried foulbecause a major credit card company an-nounced it would close its Tampa call center,lay off 1,110 workers, and outsource those jobs to another company. The reason for thelawmakers’ ire was that the company hadbeen lured to Florida with a generous taxincentive package and had enjoyed nearly $3million worth of tax breaks during theprevious nine years.
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Another example comesfrom
USA Today
article chronicled thatsimilar problems other states are having
1U.S. Department of Labor, “Extended Mass Layoffs in the First Quarter of 2007,” August 9, 2007, located athttp://www.bls.gov/opub/ted/2007/may/wk2/art04.htm . In the press release, DOL reported that, “In the 61actions where employers were able to provide more complete separations information, 84 percent of relocations (51out of 61) occurred among establishments within the same company. In 64 percent of these relocations, the work activities were reassigned to place elsewhere in the U.S. Thirty six percent of the movement-of-work relocationsinvolved out-of-country moves (22 out of 50).2Dave Wasson, “Florida Lawmakers Slam Capital One’s Layoff After Years of Tax Breaks,” Tax Analysts, July 24, 2004.
Kail Padgitt, Ph.D., is an economist at the Tax Foundation. He would like to thank the authors of previous editions: JoshuaBarro, Curtis Dubay, Chris Atkins, Scott Moody, Wendy Warcholik and Scott Hodge.
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with companies who receive generous taxincentives.
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Lawmakers create these deals under thebanner of job creation and economic develop-ment, but the truth is that if a state really can’tattract employers without such packages, it isoften because punitive tax laws have created a woeful business tax climate. Alas, it’s a viciouscycle. States give away tax revenue to new busi-nesses, creating pressure for higher tax rates; andthe higher the state’s statutory tax rates, the moreimportant special packages become. A far moreeffective approach is to systematically improve thebusiness tax climate for the long term so as toimprove the state’s competitiveness. Whenassessing which changes to make, lawmakers needto remember these two rules:1.Taxes matter to business. Business taxes affectbusiness decisions, job creation and retention,plant location, competitiveness, the transpar-ency of the tax system, and the long-termhealth of a state’s economy. Most importantly,taxes diminish profits. If taxes take a largerportion of profits, that cost is passed along toeither consumers (through higher prices), workers (through lower wages or fewer jobs), orshareholders (through lower dividends or sharevalue). Thus, a state with lower tax costs will bemore attractive to business investment, andmore likely to experience economic growth.2.States do not enact tax changes (increase orcuts) in a vacuum. Every tax law will in some way change a state’s competitive positionrelative to its immediate neighbors, its geo-graphic region, and even globally. Ultimately it will affect the state’s national standing as aplace to live and to do business. Entrepreneur-ial states can take advantage of the tax increasesof their neighbors to lure businesses out of high-tax states.
Figure 1State Business Tax Climate Index, Fiscal Year 2010
3Dennis Cauchon, “Business Incentives Lose Luster for States,” USA Today, August 22, 2007
10 worst business tax climates10 best business tax climates TX#11FL#5AK #3HI#24LA#35MS#21AL#19GA#29OK #31AR#40NM#23AZ#28AZ#28NV#4CA#48CO#13KS#32MO#16NC#39VA#15KY#20OH#47
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#30WI#42IA#46MN#43UT#10WV#37PA#27ME#34MD#45DE#8NJ#50CT#38RI#44MA#36VT#41NH#7SD#1ND#25WY#2MT#6ID#18OR#14WA#9 TN#22
I N
#12NE#33MI#17NY#49SC#26
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Table 1State Business Tax Climate Index, 2006 – 2010
FY 2010 StateFY 2009 StateFY 2008 StateFY 2007 StateFY 2006 StateBusiness Tax Business TaxChange from Business Tax Business Tax Business TaxClimate IndexClimate Index2009 to 2010Climate IndexClimate IndexClimate Index
State Score Rank Score Rank Score Rank Score Rank Score Rank Score RankU.S. 5.00 – 5.00 – 0 – 5.00 – 5.00 – 5.00 –Alabama 5.19 19 5.30 20 –0.11 1 5.08 23 5.16 22 5.60 16Alaska 7.38 3 7.32 4 0.06 1 7.13 3 6.99 4 7.29 3Arizona 5.01 28 5.25 24 –0.23 –4 5.01 25 4.95 29 5.13 29Arkansas 4.61 40 4.87 35 –0.25 –5 4.65 37 4.72 36 4.87 35California 3.89 48 4.14 48 –0.11 1 3.93 49 3.92 48 4.64 42Colorado 5.63 13 5.89 13 –0.26 0 5.89 10 5.90 11 5.70 13Connecticut 4.72 38 4.81 37 –0.09 –1 4.60 38 4.69 39 4.66 41Delaware 5.98 8 6.01 10 –0.02 2 6.09 9 6.11 8 6.10 9Florida 6.62 5 6.92 5 –0.30 0 6.67 5 6.79 5 6.85 5Georgia 5.01 29 5.16 27 –0.15 –2 4.95 28 5.18 21 5.52 20Hawaii 5.05 24 5.27 22 –0.22 –2 5.27 18 5.34 16 5.28 24Idaho 5.21 18 5.10 29 0.11 11 5.09 22 5.05 26 5.08 30Illinois 5.01 30 5.26 23 –0.26 –7 5.04 24 4.92 31 5.22 26Indiana 5.67 12 5.88 14 –0.20 2 5.65 13 5.72 12 5.86 12Iowa 4.23 46 4.35 44 –0.12 –2 4.16 46 4.36 45 4.62 44Kansas 4.93 32 5.07 31 –0.14 –1 4.87 31 4.77 35 4.99 33Kentucky 5.18 20 4.95 34 0.23 14 4.98 27 4.96 28 4.75 38Louisiana 4.74 35 4.98 33 –0.24 –2 4.75 34 4.79 33 5.05 32Maine 4.83 34 4.69 40 0.14 6 4.72 35 4.72 37 4.64 43Maryland 4.26 45 4.31 45 –0.06 0 4.14 47 5.08 24 5.23 25Massachusetts 4.73 36 4.99 32 –0.26 –4 4.80 33 4.79 34 4.87 36Michigan 5.35 17 5.30 21 0.05 4 5.32 17 5.14 23 5.20 28Minnesota 4.44 43 4.61 41 –0.18 –2 4.40 42 4.39 43 4.71 39Mississippi 5.16 21 5.32 19 –0.16 –2 5.09 22 5.21 19 5.57 19Missouri 5.37 16 5.57 16 –0.20 0 5.35 16 5.37 15 5.68 14Montana 6.32 6 6.27 6 0.05 0 6.35 6 6.42 6 6.16 8Nebraska 4.88 33 4.55 42 0.32 9 4.55 40 4.55 41 4.59 45Nevada 7.05 4 7.37 3 –0.31 –1 7.07 4 7.07 3 7.07 4New Hampshire 6.25 7 6.21 7 0.05 0 6.29 7 6.32 7 6.45 6New Jersey 3.60 50 3.90 50 –0.30 0 3.71 50 3.68 50 3.63 48New Mexico 5.06 23 5.17 26 –0.11 3 4.93 29 5.05 25 5.30 23New York 3.66 49 4.00 49 –0.47 –2 4.19 45 4.29 46 3.60 49North Carolina 4.66 39 4.74 39 –0.08 0 4.52 41 4.52 42 4.70 40North Dakota 5.04 25 5.08 30 –0.04 5 4.86 32 4.87 32 5.06 31Ohio 4.04 47 4.15 47 –0.08 1 3.95 48 3.95 47 3.82 47Oklahoma 4.97 31 5.40 18 –0.43 –13 5.18 19 5.20 20 5.41 21Oregon 5.59 14 6.04 8 –0.44 –6 6.12 8 6.06 9 6.02 10Pennsylvania 5.03 27 5.14 28 –0.10 1 4.92 30 4.95 30 5.31 22Rhode Island 4.33 44 4.18 46 0.15 2 4.20 44 3.80 49 3.47 50South Carolina 5.03 26 5.21 25 –0.17 –1 5.01 26 4.98 27 5.21 27South Dakota 7.42 1 7.50 2 –0.08 1 7.21 2 7.18 2 7.56 2Tennessee 5.10 22 5.42 17 –0.32 –5 5.16 20 5.27 17 5.58 18Texas 5.70 11 6.02 9 –0.32 –2 5.79 11 5.99 10 6.41 7Utah 5.80 10 5.94 11 –0.14 1 5.71 12 5.23 18 5.67 15Vermont 4.56 41 4.52 43 0.03 2 4.34 43 4.37 44 4.57 46Virginia 5.53 15 5.70 15 –0.17 0 5.51 15 5.51 14 5.58 17Washington 5.81 9 5.94 12 –0.13 3 5.65 14 5.67 13 5.93 11West Virginia 4.73 37 4.86 36 –0.13 –1 4.66 36 4.71 38 4.93 34Wisconsin 4.54 42 4.76 38 –0.22 –4 4.56 39 4.57 40 4.77 37Wyoming 7.38 2 7.50 1 –0.12 –1 7.24 1 7.46 1 7.64 1District of Columbia 4.72 – 4.53 – 0.20 – 4.53 – 4.49 – 4.06 –
Note: The higher the score, the more favorable a state's tax system is for business. All scores are for fiscal years.
Source: Tax Foundation
Clearly, there are many non-tax factors thataffect a state’s overall business climate: its proxim-ity to raw materials or transportation centers, itsregulatory or legal structures, the quality of itseducation system and the skill of its workforce,not to mention the intangible perception of a
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2010 State Business Tax Climate Index
The Tax Foundation's 2010 State Business Tax Climate Index was released yesterday, ranking West Virginia 37th in the nation for "tax-friendliness."
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