There have been a number of surveys conducted that attempt to measure the desirability of doing or investing in business in one state versus another.

While they examine different factors, recent polls by the Small Business & Entrepreneurship Council, the Tax Foundation, and Big Four firm Ernst & Young and the Council on State Taxation all agree on the importance of taxation in making it attractive to do business in a particular state.

Analysts say that the highest-in-the-world U.S. tax rate has affected the competitiveness of U.S.-based companies, making the U.S. a less attractive place to start or maintain a business. The same analysis, applied to the states, indicates the importance of tax as a factor in deciding to operate a business within a particular state.

"No one argues that taxes don't matter," said Joseph Henchman, vice president of state projects at the Tax Foundation. "Back in the day, people did argue over this, especially when we had a top federal rate of 90 percent, and then 70 percent. An extra couple of percent at the state level didn't really matter. Now, especially for small business where the individual rate has come down into the 30s, what states offer matters a lot more."

"Higher taxes have an impact on a state's competitiveness," agreed Raymond J. Keating, chief economist for the SBE Council. "If anything, the intensity is even more on the state side, because it's easier for entrepreneurs to move from California to Nevada than from one country to another."

 

STATE RANKINGS

The SBE Council's Business Tax Index 2011 ranks the 50 states and the District of Columbia according to the costs of their tax systems for entrepreneurship and small business. It is based on 18 different tax measures - including top personal income tax rate, top individual capital gains rate, top corporate income tax rate, top corporate capital gains tax rate, and any added income tax on S corporations - and combines those into one tax score. Among the taxes it includes in its scoring are income, capital gains, property, death/inheritance, unemployment, and various consumption-based taxes.

"State and local taxes affect the decisions made by entrepreneurs, investors, businesses and individuals," said Keating. "Several states in recent years have hiked taxes in response to excessive government spending, and declining revenues in a down economy. ... The implications for entrepreneurship, small businesses, competitiveness, investment and employment are significant."

The SBE Council's Business Tax Index's findings are not all that different from recent surveys by Ernst & Young's study in conjunction with the Council on State Taxation, and a study by the Tax Foundation. Three out of the five best states in the SBE Council findings - South Dakota, Wyoming and Nevada - also ranked in the top five in the Tax Foundation study. Four out of the six worst states in the SBE Council study - New York, California, New Jersey and Iowa - also were sited in the bottom six of the Tax Foundation study.

The State Business Tax Climate Index examines five separate aspects of state tax systems, and includes five component indexes: corporate tax, individual income tax, sales tax, unemployment tax and property tax.

"Of course, taxes are just one part of the equation," explained Henchman. "Other things matter too, such as education, transportation, quality of state services, and regulation. The one thing that sets taxes apart is that it's something that legislators can act on and change immediately."

 

SPARKING RELOCATION

Most mass job relocations are from one U.S. state to another, rather than to an overseas location, noted Kail Padgitt, author of the State Business Tax Climate Index. "State lawmakers are right to be concerned about how their states rank in the global competition for jobs and capital, but they need to be more concerned with companies moving from Detroit to Dayton, Ohio, rather than from Detroit to New Delhi," he said.

For example, he cited the decision by California-based Intel to build a multi-billion-dollar chip-making facility in Arizona in 2005, due to its favorable corporate income tax system. And earlier this year, Northrop Grumman chose to move its headquarters to Virginia, instead of Maryland, due to the better business tax climate.

Personal income tax rates influence business far more than generally assumed, according to the SBE study, since more than 92 percent of businesses file taxes at the individual rate. High state unemployment tax rates increase the relative cost of labor versus capital, and provide incentives for labor-intensive businesses to flee high-tax states.

"Each tax hits business directly or indirectly, distorts the workings of the marketplace, and diminishes economic efficiency by shifting resources from the private sector (guided by prices, profits and losses), into government (guided by politics and special interest pressures)," said Keating, who authored the study. "In the end, though, all taxes matter, whether imposed at the federal, state or local level of government. They matter to consumers, entrepreneurs, investors and businesses. They matter in terms of a state's competitiveness. And they matter when it comes to economic growth and job creation."

 

 

The five best state tax systems:

1. South Dakota

2. Texas

3. Nevada

4. Wyoming

5. Washington

The worst:

45. California

46. Maine

47. Iowa

48. New York

49. New Jersey

50. Minnesota

51. District of Columbia

Source: Business Tax Index 2011, SBE Council

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