A combination of both strong economic growth and low unemployment helped keep state tax rates flat for 2006. Nevertheless, some states are continuing to mine tax-related revenue streams."Currently, there are several states that are looking to improve their tax structure," explained Curtis Dubay, an economist at the Tax Foundation.

Dubay, who co-authored the State Tax Business Climate Index, recently updated the state individual income tax rates for 2006. "Lowering tax rates is an easy way to keep a state competitive, attract new business and promote growth."

Dubay said that during the past year:

* New York allowed two temporary income tax rates of 7.375 percent over $100,000 and 7.7 percent over $500,000 to expire.

* Arizona cut its rates across the board - lowering its top rate from 5.04 percent to 4.79 percent.

* Nebraska increased the size of its top two brackets.

* New Mexico continued to lower its top rate, dropping it from 5.7 percent to 5.3 percent.

* Ohio continued the phase-down of its rates, and its top rate now rests at 6.87 percent, down from 7.185 percent for tax year 2005.

* Oklahoma and Utah widened their brackets.

* Washington, D.C., lowered its rates and widened its top bracket.

"It's not surprising," said Dubay. "The economy is doing so well that states are flush with cash. In good economic times, there's no reason to raise taxes, because there are no budgetary shortfalls," he said.

However, some states are finding ways to raise taxes without seeming to, according to Dubay. "States that are increasing their taxes are doing it on the business side, because it's a politically easier way to raise revenue," he said. "For example, in Illinois, the governor said he would not raise taxes on working people, but then he proposed a gross receipts tax which will disproportionately hurt low-income people, because it will raise the cost of all goods for lower-income households."

The prices of all goods rise under the gross receipts tax, because it is imposed at each step of the process by which consumers receive goods, he explained. "The farmer has to pay the tax when he sells his wheat to the mill. The mill pays the tax when it sells flour to the baker. And the baker pays the tax when he sells the baked goods to the distributor, and on and on through the supply chain. It's like the [value-added tax], only worse, because there's no subtractability. In a VAT, the tax on intermediate goods is subtractable, and is only paid at the final stage of production, not on intermediate stages."

Other states, meanwhile, are also on the hunt for increased revenue on the business side. "Ohio recently enacted a commercial activities tax, which will be fully implemented in 2010," he said. "Texas just passed a margin tax to replace the old corporate franchise tax. Although Michigan repealed its Single Business Tax at the end of last year, it's busy looking for a replacement."

The Ohio Commercial Activity Tax is a business gross receipts tax applicable to nearly everyone doing business in the state. The Texas Margin Tax, which was designed to eliminate loopholes in the corporate franchise tax, went into effect Jan. 1, 2007. The Michigan Single Business Tax was a value-added tax that will be completely phased out by 2009.

The Texas Margin Tax was created because politicians need to continue to tell the story that Texas does not have a state income tax for individuals or businesses. The margin tax allows them to continue to say this, even though it is based on income, according to Bic Wood, of Austin, Texas-based CPA firm Wood, Johnson, Heath PC.

"The point is that state governments have plenty of money, and there's no impetus for tax increases, so those doing it are doing it in a slightly dishonest or backhanded way, because they are hiding it from the people. Although the legal responsibility falls on businesses to collect the tax, the true burden falls on individuals," said Dubay.

"Pennsylvania has just proposed a substantial business tax increase," he continued. "Part of it is a windfall profit tax on oil companies that will increase the price of gas not just for Pennsylvania residents but for everyone. Wisconsin also has proposed a similar tax. The governor says he will not allow oil companies to pass it on to the consumer, but I don't know how he intends to do this."

"There are only three possible groups of people who can pay the tax - shareholders, consumers or employees," Dubay said. "They forget that companies are a legal fiction and that it's the people that pay the tax."

A number of states are increasing tax rates through the sales tax. "They say that it will enable them to decrease property taxes," said Dubay. "Just last year, Idaho, New Jersey and South Carolina increased their sales taxes for that reason."

"Property taxes are universally disliked because they have been rising as real estate prices have gone up," he added. "Taxpayers hate them because they have to write a check to pay them. If you had to write a check for income tax every time you got paid, or every time you bought something, you would dislike it just as much as the property tax."


Dubay, who recently completed the State Business Tax Climate Index, said that individual income tax was one of five component indexes in the study.

"The study places 113 variables into five component indexes," he said. "In addition to individual income tax, it includes a corporate tax index, sales tax index, unemployment tax index and property tax index."

The study calculated a total score for each state, and grouped the states according to their business tax climate. In the 2007 ranking, Wyoming comes in first as the business-friendliest state from a tax standpoint. It is followed by South Dakota, Alaska, Nevada, Florida, Texas, New Hampshire, Montana, Delaware and Oregon. At the bottom, the 41st-ranked state is Minnesota, followed by Maine, Iowa, Nebraska, California, Vermont, New York, New Jersey, Ohio and Rhode Island.

"We found that states with the best business tax climates are growing at faster rates than states with higher burdens and poorer business climates," said Dubay. "We live in a highly competitive global market. Estonia, Latvia, Lithuania, the Czech Republic and Ireland have drastically slashed corporate income tax rates and also have low individual income rates, and they all have great economic growth. Naturally, capital will flow to places where it can be most efficiently productive."

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