Nevada ranked No. 4 this year, the same as the prior year and consistent with its place either third or fourth since 2006.
“States do not enact tax changes in a vacuum,” said Scott Hodge, president of the Tax Foundation. “Every tax change will affect a state’s competitive position relative to its neighbors.”
The goal of the index, according to a Tax Foundation press release, is to focus lawmakers’ attention on the importance of good tax fundamentals, including the enactment of low tax rates and granting as few deductions, exemptions and credits as possible. This “broad base, low rate” approach is the antithesis of most efforts by state economic development departments, which specialize in designing “packages” of short-term tax abatements, exemptions and other giveaways for prospective employers that have announced that they would consider relocating. Those packages routinely include such large state and local exemptions that resident businesses must pay higher taxes to make up for the lost revenue.
“The temptation is for state lawmakers to lure high-profile companies with packages of tax bonuses,” said Kail Padgitt, the author of the 2011 edition of the index, “but that strategy often backfires if the company does not prosper.”
The 10 states that had the best tax climates as of July 1, which is the first day of the 2011 fiscal year, were South Dakota, Alaska, Wyoming, Nevada, Florida, Montana, New Hampshire, Delaware, Utah and Indiana.
“The top eight tax systems all raise sufficient revenue without imposing one or two of the three major state taxes — sales taxes, personal income taxes and corporate income taxes,” Hodge said.
The 10 states with the least hospitable business tax climates are New York, California, New Jersey, Connecticut, Ohio, Iowa, Maryland, Minnesota, Rhode Island and North Carolina.
Raising Nevada's tax climate ranking were such factors as lack of an income tax, corporate tax and gross receipts tax.
The worst-ranked state tax codes tend to have complex, multi-rate corporate and individual income taxes with above-average tax rates; above-average sales tax rates that don’t exempt business-to-business purchases; complex, high-rate unemployment tax systems; and high property tax collections as a percentage of personal income.
In the index, Nevada was listed among the states that received the worst scores in the unemployment insurance tax base. In general, Nevada was ranked as having more complicated experience formulae, excluding fewer factors from the charging method and having complicated systems with add-ons and surtaxes. Factors considered in this sub-index are experience rating formulas, charging methods and a host of smaller factors aggregated into one variable.
Nevada also received a poor score for being among the 13 states that charge a person's most recent employer when that person files for unemployment benefits.
The methodology of the State Business Tax Climate Index is centered on the idea of economic neutrality. If a state’s tax system maintains a level playing field for businesses, the index considers it neutral and ranks it highly. However, each state’s final score depends on a comparison with the other 49 states.
The overall index is composed of five specific indexes devoted to major features of a state’s tax system: the state’s major business tax, corporate income tax or a gross receipts tax; the individual income tax; the general and selective sales taxes; the unemployment insurance tax; and asset-based taxes including property taxes. Each of these five indexes is composed of several sub-indexes.
State tax changes made after July 1 are the subject of commentary in the report’s appendix but are not tallied in the scores and rankings.
The Tax Foundation is a nonpartisan, nonprofit organization that monitors fiscal policy at the federal, state and local levels. Tax Foundation Background Paper No. 60, “2011 State Business Tax Climate Index,” is available online at www.taxfoundation.org.