The Entrepreneurial View #458
State Tax Scores
by Raymond J. Keating
Just how good or bad are the states when it comes to taxes affecting small business?
The just-published "Small Business Survival Index 2007" ranks the states according to their overall public policy climates for entrepreneurship. The Index features tax, regulatory, mandate, government spending, tort and property rights measures. Of the 31 measures included in this year's Index, 15 are tax-related.
So, breaking out the tax measures, we get an interesting ranking of the 50 states and District of Columbia according to their respective tax scores.
On the Small Business Survival Index 2007 Tax Scores, the top dozen - or the lowest tax cost states - are 1) South Dakota, 2) Nevada, 3) Wyoming, 4) Washington, 5) Florida, 6) Alaska, 7) Michigan, 8) Texas, 9) Colorado, 10) Alabama, 11) Mississippi, and 12) South Carolina. At the other end are the bottom dozen with highest tax costs - 40) Hawaii, 41) Idaho, 42) Vermont, 43) Massachusetts, 44) New York, 45) Rhode Island, 46) California, 47) Maine, 48) Iowa, 49) Minnesota, 50) New Jersey, and 51) District of Columbia.
Below is the total ranking of all states:
Small Business Survival Index 2007: Tax Score
Rank
1 South Dakota
2 Nevada
3 Wyoming
4 Washington
5 Florida
6 Alaska
7 Michigan
8 Texas
9 Colorado
10 Alabama
11 Mississippi
12 South Carolina
13 Tennessee
14 Missouri
15 Virginia
16 Arizona
17 Oklahoma
18 Georgia
19 Maryland
20 Illinois
21 Indiana
22 Delaware
23 Arkansas
24 New Hampshire
25 Kentucky
26 New Mexico
27 Ohio
28 Pennsylvania
29 Utah
30 Louisiana
31 Montana
32 Connecticut
33 North Dakota
34 Wisconsin
35 Kansas
36 Oregon
37 Nebraska
38 North Carolina
39 West Virginia
40 Hawaii
41 Idaho
42 Vermont
43 Massachusetts
44 New York
45 Rhode Island
46 California
47 Maine
48 Iowa
49 Minnesota
50 New Jersey
51 Dist. of Columbia
How are the states actually measured in terms of where they stack up on taxes? The following explanations on the economics and measurements for each indicator come directly from the "Small Business Survival Index 2007" (You can visit the following link to view a breakdown of all the specific tax measurements used to rank the states on their tax scores: http://www.sbecouncil.org/uploads/EV%20_458%20-%20table.pdf)
Personal Income Tax - State personal income tax rates affect individual economic decision-making in important ways. A high personal income tax rate raises the costs of working, saving, investing, and risk taking. Personal income tax rates vary among states, therefore impacting crucial economic decisions and activities. In fact, the personal income tax influences business far more than generally assumed because roughly 90 percent of businesses file taxes as individuals (e.g., sole proprietorship, partnerships and S-Corps.), and therefore pay personal income taxes rather than corporate income taxes. Measurement in the Small Business Survival Index: state's top personal income tax rate.
Individual Capital Gains Tax - One of the biggest obstacles that start-ups or expanding businesses face is access to capital. State capital gains taxes, therefore, affect the economy by directly impacting the rate of return on investment and entrepreneurship. Indeed, capital gains taxes are direct levies on risk taking, or the sources of growth in the economy. High capital gains taxes restrict access to capital, and help to restrain or redirect risk taking. Measurement in the Small Business Survival Index: state's top capital gains tax rate on individuals.
Corporate Income Tax - State corporate income tax rates similarly affect a broad range of business decisions - most clearly decisions relating to investment and location - and obviously make a difference in the bottom line returns of corporations. Measurement in the Small Business Survival Index: state's top corporate income tax rate.
Corporate Capital Gains Tax -- Again, access to capital is an enormous obstacle for businesses, and state capital gains taxes affect the economy by directly reducing the rate of return on investment and entrepreneurship. High capital gains taxes - including on corporate capital gains - restrict access to capital, and help to restrain or redirect risk taking. Measurement in the Small Business Survival Index: state's top capital gains tax rate on corporations.
Additional Income Tax on S-Corporations -- Subchapter S-Corporations let certain businesses adopt the benefits of a corporation, while allowing income to pass through to be taxed at the individual level. Most states recognize S Corporations, but a few either tax such businesses like other corporations or impose some kind of added tax. Such an additional income tax, again, raises costs, restrains investment, and hurts the state's competitiveness. Measurement in the Small Business Survival Index: additional income tax imposed on S-Corporations beyond the top personal income tax rate.
Individual Alternative Minimum Tax -- The individual alternative minimum tax (AMT) imposes a minimum tax rate that must be paid by individuals, regardless the tax credits or deductions taken. The AMT diminishes the effectiveness of potentially positive, pro-growth tax relief measures, while also raising the costs of tax compliance. Measurement in the Small Business Survival Index: state individual alternative minimum tax (states imposing an individual AMT receive a score of "1" and states that do not receive a score of "0").
Corporate Alternative Minimum Tax -- The corporate alternative minimum tax (AMT) imposes a minimum tax rate that must be paid by corporations, regardless of the available tax credits or deductions taken. Again, the AMT diminishes the effectiveness of potentially positive, pro-growth tax relief measures, and hikes compliance costs, in particular by forcing firms to effectively calculate their taxes under two tax codes. Measurement in the Small Business Survival Index: state corporate alternative minimum tax (states imposing an individual AMT receive a score of "1" and states that do not receive a score of "0").
Indexing Personal Income Tax Rates -- Indexing income tax rates for inflation is a positive tax measure, which ensures that inflation does not push individuals into higher tax brackets. Without such indexation, one can be pushed into a higher tax bracket without any increases in real income. Measurement in the Small Business Survival Index: state indexing of personal income tax rates (states indexing their personal income tax rates receive a score of "0" and states that do not receive a score of "1").
Property Taxes -- Property taxes influence decisions as to where businesses, entrepreneurs and employees choose to locate, as well as decisions relating to investments in business facilities and homes. Measurement in the Small Business Survival Index: state and local property taxes (property taxes as a share of personal income).
Sales, Gross Receipts and Excise Taxes -- State and local sales, gross receipts and excise (including tobacco, alcohol and insurance) taxes impact the economic decisions of individuals and families, as well as various businesses. High consumption-based taxes can re-direct consumer purchases, and, especially if combined with other levies like income and property taxes, can serve as real disincentives to productive economic activity. In addition, gross receipts taxes present problems because, unlike other consumption-based levies, they are largely hidden from the view of consumers, and therefore, are easier to increase. Measurement in the Small Business Survival Index: state and local sales, gross receipts and excise taxes (sales, gross receipts and excise taxes [less revenues from gas taxes, since gas tax rates are singled out in the Index] as a share of personal income).
Death Taxes -- The federal government is phasing out the federal death tax. Some states are tied to the federal levy, and therefore are following the lead to end the estate tax (under current law, the federal estate tax will be eliminated in 2010, but it then reappears in 2011). However, other states have imposed additional estate, inheritance or gift taxes, or have de-linked from the federal levy. Death taxes have several problems. In terms of fairness, individuals pay a staggering array of taxes, including on business earnings, over a lifetime, but then are socked with another tax on the total assets at death. High state death taxes offer incentives to move investment and business ventures to less taxing climates; foster wasteful expenditures on tax avoidance, estate planning and insurance; and force many businesses to be sold, borrowed against or closed down. Measurement in the Small Business Survival Index: state death taxes (states levying estate or inheritance taxes receive a score of "1" and states that do not receive a score of "0").
Unemployment Tax Rates -- The unemployment tax on wages is another burden on entrepreneurs and business. High state unemployment tax rates increase the relative cost of labor versus capital, and provide incentives for labor-intensive businesses to flee from high-tax states to low-tax states. Measurement in the Small Business Survival Index: unemployment tax rate is adjusted as follows: maximum state tax rate applied to state unemployment tax wage base, with that amount as a share of the state average wage.
Tax Limitation States -- Requiring supermajority votes from elected officials and/or approval from voters in order to increase or impose taxes, serve as checks on the growth of taxes and government in general. According to Americans for Tax Reform, both taxes and spending do in fact grow more slowly in tax limitation states, and economies expand faster in such states as well. Measurement in the Small Business Survival Index: tax limitation status (states without some form of tax limitation check receive a score of "1," and states with some kind of tax limitation check receive a score of "0").
Internet Taxes -- The Internet serves as a tremendous boost to economic growth and a great expansion of economic opportunity. For small businesses, the Internet allows for greater access to information and markets. Indeed, the Internet gives smaller enterprises access to global markets that they might not have had in the past. Unfortunately, some states have chosen to impose sales taxes on Internet access. Measurement in the Small Business Survival Index: Internet access tax (states without such a sales access tax score "0," and states with such taxes score "1").
Gas Tax -- Every business is affected by the costs of operating motor vehicles -- from trucking firms to the home-based business paying for delivery services. State government directly impacts these costs through taxes on motor fuels. Measurement in the Small Business Survival Index: state gas tax (dollars per gallon).
Taxes most certainly matter to small businesses and entrepreneurs. Taxes impact the bottom line, and affect the incentives as to where people will live, work, invest and undertake entrepreneurial ventures. That, in turn, means taxes matter to job creation and the state's economy.
Reduce the tax burden, and the results will include a better state climate for entrepreneurship.
_______
Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.
This article may be reprinted with appropriate citation and credit.
