| Table 2. State Business Tax Climate Index, 2011-2012 | |||||||||
| FY 2012 | FY 2011 | Change From 2011 to 2012 | |||||||
| State | Score | Rank | Score | Rank | Score | Rank | |||
| Alabama | 5.31 | 20 | 5.35 | 20 | -0.04 | 0 | |||
| Alaska | 7.36 | 4 | 7.44 | 3 | -0.08 | -1 | |||
| Arizona | 5.11 | 27 | 5.14 | 27 | -0.03 | 0 | |||
| Arkansas | 4.94 | 31 | 4.94 | 32 | 0.00 | 1 | |||
| California | 3.71 | 48 | 3.61 | 48 | 0.10 | 0 | |||
| Colorado | 5.41 | 16 | 5.50 | 17 | -0.10 | 1 | |||
| Connecticut | 4.56 | 40 | 4.53 | 40 | 0.03 | 0 | |||
| Delaware | 5.75 | 12 | 5.76 | 12 | -0.01 | 0 | |||
| Florida | 6.90 | 5 | 6.84 | 5 | 0.06 | 0 | |||
| Georgia | 4.84 | 34 | 4.82 | 34 | 0.01 | 0 | |||
| Hawaii | 4.83 | 35 | 4.80 | 35 | 0.03 | 0 | |||
| Idaho | 5.23 | 21 | 5.21 | 22 | 0.02 | 1 | |||
| Illinois | 5.05 | 28 | 5.52 | 16 | -0.47 | -12 | |||
| Indiana | 5.99 | 11 | 5.99 | 11 | 0.00 | 0 | |||
| Iowa | 4.47 | 41 | 4.38 | 42 | 0.09 | 1 | |||
| Kansas | 5.13 | 25 | 5.14 | 26 | -0.01 | 1 | |||
| Kentucky | 5.20 | 22 | 5.17 | 25 | 0.03 | 3 | |||
| Louisiana | 4.93 | 32 | 4.94 | 31 | -0.01 | -1 | |||
| Maine | 4.78 | 37 | 4.70 | 38 | 0.08 | 1 | |||
| Maryland | 4.43 | 42 | 4.21 | 44 | 0.22 | 2 | |||
| Massachusetts | 5.17 | 24 | 5.12 | 28 | 0.05 | 4 | |||
| Michigan | 5.37 | 18 | 5.37 | 19 | -0.01 | 1 | |||
| Minnesota | 4.20 | 45 | 4.18 | 45 | 0.02 | 0 | |||
| Mississippi | 5.39 | 17 | 5.39 | 18 | 0.00 | 1 | |||
| Missouri | 5.47 | 15 | 5.63 | 14 | -0.16 | -1 | |||
| Montana | 6.25 | 8 | 6.30 | 7 | -0.05 | -1 | |||
| Nebraska | 4.95 | 30 | 4.99 | 30 | -0.04 | 0 | |||
| Nevada | 7.45 | 3 | 7.42 | 4 | 0.03 | 1 | |||
| New Hampshire | 6.39 | 6 | 6.44 | 6 | -0.05 | 0 | |||
| New Jersey | 3.33 | 50 | 3.34 | 50 | -0.01 | 0 | |||
| New Mexico | 4.72 | 38 | 4.76 | 37 | -0.04 | -1 | |||
| New York | 3.59 | 49 | 3.60 | 49 | -0.02 | 0 | |||
| North Carolina | 4.22 | 44 | 4.08 | 46 | 0.14 | 2 | |||
| North Dakota | 4.98 | 29 | 4.87 | 33 | 0.11 | 4 | |||
| Ohio | 4.56 | 39 | 4.54 | 39 | 0.03 | 0 | |||
| Oklahoma | 4.92 | 33 | 5.01 | 29 | -0.09 | -4 | |||
| Oregon | 5.62 | 13 | 5.61 | 15 | 0.01 | 2 | |||
| Pennsylvania | 5.32 | 19 | 5.33 | 21 | -0.01 | 2 | |||
| Rhode Island | 4.18 | 46 | 3.88 | 47 | 0.30 | 1 | |||
| South Carolina | 4.82 | 36 | 4.77 | 36 | 0.05 | 0 | |||
| South Dakota | 7.54 | 2 | 7.57 | 2 | -0.03 | 0 | |||
| Tennessee | 5.62 | 14 | 5.65 | 13 | -0.03 | -1 | |||
| Texas | 6.08 | 9 | 6.12 | 9 | -0.03 | 0 | |||
| Utah | 6.04 | 10 | 6.09 | 10 | -0.04 | 0 | |||
| Vermont | 4.17 | 47 | 4.23 | 43 | -0.06 | -4 | |||
| Virginia | 5.11 | 26 | 5.20 | 23 | -0.08 | -3 | |||
| Washington | 6.36 | 7 | 6.20 | 8 | 0.16 | 1 | |||
| West Virginia | 5.19 | 23 | 5.17 | 24 | 0.02 | 1 | |||
| Wisconsin | 4.38 | 43 | 4.40 | 41 | -0.01 | -2 | |||
| Wyoming | 7.67 | 1 | 7.63 | 1 | 0.04 | 0 | |||
| DC | 4.48 | 4.43 | 0.05 | ||||||
| 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 | |||||||||
The 10 best states in this year’s Index are:
1. Wyoming
2. South Dakota
3. Nevada
4. Alaska
5. Florida
6. New Hampshire
7. Washington
8. Montana
9. Texas
10. Utah
It is obvious that the absence of a major tax is a dominant factor in vaulting many of these 10 states to the top of the rankings. Property taxes and unemployment insurance taxes are levied in every state, but there are several states that do without one or more of the major taxes: the corporate tax, the individual income tax, or the sales tax. Wyoming, Nevada and South Dakota have no corporate or individual income tax; Alaska has no individual income or state-level sales tax; Florida has no individual income tax; and New Hampshire and Montana have no sales tax.
The lesson is simple: a state that raises sufficient revenue without one of the major taxes will, all things being equal, have an advantage over those states that levy every tax in the state tax collector’s arsenal.
The 10 lowest ranked, or worst, states in this year’s Index are:
41. Iowa
42. Maryland
43. Wisconsin
44. North Carolina
45. Minnesota
46. Rhode Island
47. Vermont
48. California
49. New York
50. New Jersey
New Jersey scores at the bottom by having the third-worst individual income tax, the fifth-worst sales tax, the 13th-worst corporate tax, and the second-worst property tax. Rhode Island has improved from 47th to 46th by implementing a modest individual income tax reform, but still has the worst unemployment tax system and fifth-worst property tax system. Maryland improved from 44th to 42nd this year due mostly to the expiration of the state’s “millionaire’s tax” on high-income earners. The states in the bottom 10 suffer from the same afflictions: complex, non-neutral taxes with comparatively high rates.
Illinois moved most dramatically in its Index rank over the past year, falling twelve places (from 16th place in 2011 to 28th place in 2012).
The 2012 Index represents the tax climate of each state as of July 1, 2011, the first day of the standard 2012 state fiscal year.
Methodology
The Tax Foundation’s 2012 State Business Tax Climate Index is a hierarchical structure built from five components:
- Corporate Tax
- Individual Income Tax
- Sales Tax
- Property Tax
- Unemployment Insurance Tax
Using the economic literature as our guide, we designed these five components to score each state’s business tax climate on a scale of zero (worst) to 10 (best). Each component is devoted to a major area of state taxation and includes numerous variables. Overall, there are 118 variables measured in this report.
The five components are not weighted equally, as they are in many indexes. Rather, each component is weighted based on the variability of the 50 states’ scores from the mean. The standard deviation of each component is calculated and a weight for each component is created from that measure. The result is a heavier weighting of those components with greater variability. The weighting of each of the five major components is:
33.1% — Individual Income Tax
21.4% — Sales Tax
20.3% — Corporate Tax
14.1% — Property Tax
11.1% — Unemployment Insurance Tax
This improves the explanatory power of the State Business Tax Climate Index as a whole because components with higher standard deviations are those areas of tax law where some states have significant competitive advantages. Businesses that are comparing states for new or expanded locations must give greater emphasis to tax climates when the differences are large. On the other hand, components in which the 50 state scores are clustered together, closely distributed around the mean, are those areas of tax law where businesses are more likely to de-emphasize tax factors in their location decisions. For example, Delaware is known to have a significant advantage in sales tax competition because its tax rate of zero attracts businesses and shoppers from all over the mid-Atlantic region. That advantage and its drawing power increase every time a state in the region raises its sales tax.
In contrast with this variability in state sales tax rates, unemployment insurance tax systems are similar around the nation, so a small change in one state’s law could change its component ranking dramatically.
Within each component are two equally weighted sub-indexes devoted to measuring the impact of the tax rates and the tax base. Each sub-index is composed of one or more variables. There are two types of variables: scalar variables and dummy variables. A scalar variable is one that can have any value between 0 and 10. If a sub-index is composed only of scalar variables, then they are weighted equally. A dummy variable is one that has only a value of 0 or 1. For example, a state either indexes its brackets for inflation or does not. Mixing scalar and dummy variables within a sub-index is problematic because the extreme valuation of a dummy can overly influence the results of the sub-index. To counter this effect, the Index weights scalar variables 80 percent and dummy variables 20 percent.
2012 State Business Tax Climate Index
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