November 3, 1999

On SBSC's annual "Small Business Survival Index," Tennessee and New Hampshire always rank among the most hospitable places in the nation for entrepreneurs when it comes to government-imposed costs, such as taxes. For example, the "Small Business Survival Index 1999" ranked New Hampshire fourth best and Tennessee ninth best among the 50 states and Washington, D.C.

The main reason for the good rankings is that neither New Hampshire or Tennessee imposes a general personal income tax or a capital gains tax on individuals. Considering that more than 90% of businesses are either sole proprietorships, partnership or S-Corps, and therefore pay personal income taxes rather than corporate income taxes, the lack of a personal income tax is a big plus for entrepreneurship. Likewise, the lifeblood of any business is capital, so the absence of a capital gains tax is another positive for investment and risk taking.

However, both New Hampshire and Tennessee have been flirting with the imposition of a general personal income tax. In New Hampshire, Republican and Democrat elected officials have been unwilling to stand up to a court order instructing them to change the way schools are funded in the state, and instead have been plotting new revenue sources. A statewide property tax is still being hammered out. That's bad enough, but some politicians are still pushing for a state income tax.

Meanwhile in Tennessee, Republican Governor Don Sundquist, who opposed an income tax as a candidate for governor, now is pushing for the imposition of a personal income tax.

If either state is stupid enough to take the plunge into the income tax swamp, their competitive advantage versus other states in terms of spurring entrepreneurship, innovation and growth will be wiped out. Make no mistake, by being a direct levy on working, saving, investing and risk taking, the income tax is the most economically destructive tax known to man.