New Jersey ranks at the bottom of the list in a new study of the comparative business friendliness of tax systems in the 50 states, while South Dakota is counted as most business friendly.

The annual State Business Tax Climate Index report by the Tax Foundation measures the competitiveness of the 50 states’ tax systems and ranks them based on corporate income, individual income, sales, property and unemployment insurance taxes. The states are scored on these taxes, and the scores are weighted based on the relative importance or impact of the tax to a business.

The top 10 states, from first to tenth, are South Dakota, Wyoming, Alaska, Nevada, Florida, Montana, New Hampshire, Delaware, Washington and Utah. The bottom 10 states, from 41st to 50th, are Vermont, Wisconsin, Minnesota, Rhode Island, Maryland, Iowa, Ohio, California, New York and New Jersey.

Oklahoma saw the biggest drop in ranking this year, from 19th in 2009 to 31st in 2010, due to the fact that the Tax Foundation was able to obtain much more detailed nationwide data on local-option sales taxes, which are much higher in Oklahoma than in most states (above 4 percent in several municipalities). Kentucky’s ranking improved the most – up 14 spots from 34th in 2009 to 20th in 2010. Many economically damaging changes were enacted in other states that previously ranked better than Kentucky – especially in the personal income tax – so other states’ rankings fell while Kentucky remained stable.

Other tax changes that affected states’ rankings include enactment of so-called “millionaires’ taxes” on high-income earners (often on income far less than $1 million) in states such as Hawaii, New Jersey and Oregon. New Jersey remained dead last, as it was in the 2009 Index, and Hawaii and Oregon dropped in rank by two spots to 24th and six spots to 14th, respectively. Ten states also enacted cigarette tax increases this year: Arkansas, Florida, Hawaii, Kentucky, Mississippi, New Jersey, New Hampshire, Rhode Island, Vermont and Wisconsin.

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