October 2, 2014

South Dakota, Texas Top List of Best State Tax Systems

The Small Business and Entrepreneurship Council (SBE Council) just published its Business Tax Index 2012.  The list covers what the SBE Council’s formula determines is the ” Best to Worst Tax Systems for Entrepreneurship and Small Business.”  Topping the list of the most favorable states for small businesses and startup entrepreneurs and investors are:

1) South Dakota
2) Texas
3) Nevada
4) Wyoming
5) Washington
6) Florida
7) Alaska
8 ) Alabama
9) Ohio
10) Colorado

There is an interactive map showing the best states for businesses taxes, in green. Middle of the road states are blue.  And the worst states are in red:

 Best and worst state taxes for small businesses

And what are the worst states for business taxes by name?  It probably won’t be a surprise that many of them are in the Northeast, long having reputations for being expensive jurisdictions to do business in:

42) Connecticut
43) Hawaii
44) Vermont
45) California
46) Maine
47) Iowa
48) New York
49) New Jersey
50) Minnesota
51) District of Columbia

Basis for Tax Rankings

The Business Tax Index 2012 ranks the states from best to worst based on the cost of their tax systems on entrepreneurs  and small businesses.  The Index takes into account 18 different tax measures, and combines them into a single score so the different states  and the District of Columbia can be compared.

The 18 measures include income tax, individual capital gains rate, corporate income tax, added income tax on S-Corporations,  property taxes, sales tax, death tax, Internet access tax, the so-called “Amazon” nexus tax, gas tax and wireless tax — among others.

According to Raymond J. Keating, chief economist for the SBE Council and author of the report, said, “All taxes matter, whether imposed at the federal, state or local level of government.  They matter to consumers, entrepreneurs, investors and businesses.  State and local levies matter in terms of a state’s competitiveness.  And they matter when it comes to economic growth and job creation.”

Comparisons With Other Years

And so how does the listing compare with past years?  I checked the 2010 state tax rankings and found very little difference in either the top or bottom rankings.  One notable exception:  Massachusetts managed to pull itself out of the bottom 10 and in 2012 now ranks number 35.  Hawaii and Connecticut, on the other hand, slipped a few spots since 2010. Other states may have  shifted a bit here and there, but the top and bottom are still largely the same two years later (or the states were near misses with making it into the top or bottom 10).

This year, the SBE Council’s 2012 report notes these positive and negative developments:

“On the positive side, states like Indiana, Arizona, Maine, Michigan, North Dakota, Delaware, and Oklahoma made some positive steps forward in providing tax relief. Also, in addition to some recent pro-competitive moves regarding income taxes, Ohio’s death tax will be eliminated next year (to be reflected in next year’s Business Tax Index), and Indiana has begun a long phase out of its death levy. In contrast, Oregon, Connecticut, Illinois and New York officials, for example, made their states less competitive due to various tax increases.”

 

14 Comments ▼

Anita Campbell - CEO


Anita Campbell Anita Campbell is the Founder and Publisher of Small Business Trends and has been following trends in small businesses since 2003. She is the owner of BizSugar, a social media site for small businesses, and also serves as CEO of TweakYourBiz.com.

14 Reactions

  1. Anita: Thanks for listing the states. Smiley #8 at Alabama?! ;)

    I wonder what happened with the “Live Free or Die” state of New Hampshire?

    Do you know if many companies and small business owners have moved to South Dakota?

    • Thanks about the smiley, Martin! I had to move the number and the parenthesis apart to avoid that.

      New Hampshire came in smack dab in the middle, at number 25.

      As far as South Dakota attracting new businesses, I don’t know. It’s a fairly low populated state, with rather brutal weather and some beautiful but difficult terrain, such as the Badlands. South Dakota is where Mt Rushmore is.

      – Anita

      Aita

  2. Too bad so many of the best states have such small populations. If you don’t have the talent pool it is hard to recruit great companies.

    • Hi Robert — yes, I agree. And the weather and relative harshness of the terrain tend to keep people away in some of the states. Not everyone is cut out to deal with deep canyons, mountains, dryness, and cold winter temps….

      – Anita

  3. You just wanted me to be glad I don’t live in Minnesota or D.C. right Anita! I’m not surprised to see many of the names where they were but I was surprised that Iowa and Minnesota were so low on the list. It may not be a direct correlation but with Nevada, Wyoming, and Delaware being popular states for entity formations I guess I was surprised that Delaware wasn’t in the Top 10 although the other 2 were ranked very high. Very interesting info…thanks Anita!

    • Hi Tom, I have to say I too am always surprised to see Iowa and Minnesota on the bottom of the list. I don’t think of them as high cost states like I automatically think of California and the Northeast. But there are 18 factors considered, and they add up.

      Interesting point about popular incorporation states — never thought of it that way….

      – Anita

  4. Good information. The future of our economic growth will depend on responisible (low) tax rates in the states as well as in Washinton. Most states are “getting it” now, with a few exceptions like California. Thanks for the post.

  5. Why oh why does anyone try to have the tax debate in the absence of a reasonable discussion of what you get for those taxes? A small business that can access a decently educated, healthy workforce and can ship its goods on well maintained roads might be better off in a higher tax state where it can get these things.

    Just looking at one side of the equation plays into pointless, poisonous politics and helps no-one, let alone small businesses.

    • Hi Pete,

      Thanks for your comment and sharing your point of view.

      Sorry, but I don’t agree with it, and have to push back about small businesses being better off with higher taxes. Let me take your example about “well maintained roads.” Some of the states with the worst roads IMHO are those with the highest taxes. Some of the best roads (like Florida’s) are in lower tax states. As a business owner, I personally don’t see myself or my business as “better off” with higher taxes, and roads are just one of dozens of reasons.

      The article is not about politics — I deliberately scrubbed it for references to any political party. This is an annual ranking that the Small Business and Entrepreneurship Council does every year, and we cover it one way or another in my sites every year, because it’s relevant information.

      Readers are free to question it or accept it. Or accept it in part and reject it in part. But I’ll not be silenced from discussing it just because others may not agree. This country has free speech, after all. Let us gather the facts and allow us to decide.

      Business owners are smart enough to decide for themselves whether paying higher taxes means they are better off. Some owners no doubt agree with your position about being better off — others will not agree. ALL are entitled to their position. But please don’t dismiss contrary views as if It’s all about politics or not being intelligent enough to see the bigger picture — which is the unspoken implication in your comments. Business owners are smarter than you give them credit for.

      Thanks,
      Anita

    • Pete…are you serious? Higher taxes for better roads and better educated workforce? Absence of reasonable discussion? Poisonous politics? I’m in NJ and you can see where we’re at on the list. The roads aren’t doing anything for us and we’ve opened our operations office in Arkansas (one of the blue states) and we’ve found educated and healthy people there – at least as much as what we find here in NJ with our high taxes. You’re going to need to elaborate on this one Pete and it makes me wonder if you or someone you love has a state/government job. Your comments are suspect at best unless you can provide some insight that I’m missing. Great roads, educated worker, and healthy people in exchange for higher taxes may not even be correct and is a stretch to say the least!

  6. Thanks for setting the record straight with Pete. But it will probably be fruitless. As Shakespear said, “when ignorance is bliss, tis folly to be wise”.

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