No matter where entrepreneurs decide to start a business, they face a variety of taxes and regulations that cut into the bottom line from the get-go. For a start-up in particular, there are a handful of states where the negatives outweigh the positives.
For example: Why pay out the yin-yang in taxes to do business in New Jersey when you can pay less in neighboring Pennsylvania or Delaware? (Hint: There’s no sales tax in Delaware.)
The Tax Foundation’s annual State Business Tax Climate Index explains why certain states rank near the bottom year after year, and what business-friendly governors and legislatures can do to reverse the trend. “States with the best tax systems will be the most competitive at attracting new businesses and most effective at generating economic and employment growth,” the Tax Foundation said. “Unlike changes to a state’s health care, transportation or education systems, which can take decades to implement, changes to the tax code quickly improve a state’s business climate.”
Here are a few examples of how state governments improved (and in one case worsened) conditions for businesses in 2023:
- Arizona “transitioned from a two-bracket, graduated-rate individual income tax system … to a flat tax tax rate of 2.5%, becoming one of 11 states with a flat individual income tax structure.” Arizona jumped from 19 to 14 overall for business taxes as a result.
- Mississippi made itself more attractive to manufacturers and agriculture. The state adopted permanent full expensing for qualified investments in machinery and equipment, shooting it into the top 10 best states for corporate taxes.
- Massachusetts is getting worse for business due to a new payroll tax and the adoption of a graduated income tax rate that increases the top rate from 5% to 9%. The Bay State plummeted from 34th to 46th in overall business climate rankings.
Lack of 1 or 2 of the big 3 taxes is a big plus
Just like death, taxes are unavoidable. Every state imposes unemployment taxes, for example. Companies that own facilities pay property taxes though rates vary from state to state obviously.
It’s the three “big” taxes that impact how high or low a state ranks on the Tax Foundation’s index: corporate, individual income and sales. States that don’t have one of the big three offer significant cost savings.
For example: Nevada, South Dakota and Wyoming don’t levy corporate or individual income taxes (although Nevada has a gross receipts tax). Alaska also eschews the individual and state sales taxes. And Florida remains individual income tax-free.
The top 10 ranked states for overall business climate are (in order): Wyoming, South Dakota, Alaska, Florida, Montana, New Hampshire, Nevada, Utah, North Carolina and Indiana.
Rounding out the bottom 10: Rhode Island, Hawaii, Vermont, Minnesota, Maryland, Massachusetts, Connecticut, California, New York and (coming in dead last) New Jersey.
