Some states, however, problematically impose taxes on the gross receipts of businesses with few or no deductions for expenses. Between 2005 and 2010, for example, Ohio phased in the Commercial Activities Tax (CAT), which has a rate of 0.26 percent. Washington has the Business and Occupation (B&O) Tax, which is a multi-rate tax (depending on industry) on the gross receipts of Washington businesses.
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However, carrybacks are rarely used by states and function similarly to carryforwards. A generous carryforward period (of 20 years or above) with no statutory dollar cap now allows a state to score highly on the base subindex, even if it doesn’t offer a carryback. North Carolina’s flat-rate individual income tax was reduced from 4.75 to 4.5 percent, but due to reforms in other states, this failed to improve the state’s ranking, and the state actually slid from 11th to 12th overall as other states made meaningful structural reforms. In May 2019, the Oregon legislature adopted a modified gross receipts tax, imposed at $250 plus a rate of 0.57 percent on Oregon gross receipts above $1 million. However, the new tax is not reflected in the current edition of the Index, as it does not go into effect until January 1, 2020. Unlike a sales tax, a gross receipts tax is assessed on businesses and applies to transactions at every stage of the production process, leading to tax pyramiding..
As a result, Missouri’s individual tax component ranking improved by one place, from 21st to 20th. If certain conditions regarding the state’s net revenues are satisfied in future years, the rates will be further reduced. Arizona transitioned from a two-bracket, graduated-rate individual income tax system with a top rate of 2.98 percent to a flat tax rate of 2.5 percent, becoming one of the 11 states with a flat individual income tax structure.
Table 1: State Average Tax Changes per Filer per State Under One Big Beautiful Bill Tax Changes, 2026 – 2035
They also tend to feature more complicated experience formulas and charging methods, and have added benefits and surtaxes to their systems. States with flat-rate systems score the best on this variable because their top rate kicks in at the first dollar of income (after accounting for the standard deduction and personal exemption). They are Arizona, Colorado, Idaho, Illinois, Indiana, Kentucky, Massachusetts, Michigan, New Hampshire, North Carolina, Pennsylvania, and Utah.
Arkansas and Maryland might have different political climates, but their business tax climates remain much the same—another year in the bottom 10 and losing ground in the process. Arkansas’ position on individual income taxes slipped a spot and there are no real advantages in the state’s tax structure. States that rank poorly on this component have high sales tax rates, high excise tax rates, complicated sales tax administration, and apply the sales tax to a variety of business inputs while exempting many final consumer purchases.
Tax Rates Imposed in the Most Recent Year
This variable measures the extent of double taxation on income used to pay foreign and state taxes, i.e., paying the same taxes twice. States can avoid double taxation by allowing a credit for state taxes paid to other jurisdictions. The Index measures tax structure, not all the other things businesses care about, like an educated workforce, quality of life, proximity 2021 state business tax climate index to relevant markets, or even the weather—and some of these things involve trade-offs. Taxes, however, are an important part of the mix, and modernizing a state’s tax structure helps position it for growth. States that rank better on the Index have better-structured tax codes, and states with better-structured tax codes get Wins Above Replacement.
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- Besley and Case (1995) showed that “yardstick competition” affects voting behavior, and Bosch and Sole-Olle (2006) further confirmed the results found by Besley and Case.
- At the low end are Alaska (1.82 percent), Hawaii (4.50 percent), Wyoming (5.44 percent), Maine (5.50 percent), and Wisconsin (5.70 percent).
- The corporate and income taxes only add to the problems entrepreneurs face in going to Louisiana.
- Maryland ranks 43rd in the country for property taxes, which are 1.04 percent of the home value.
Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and disco and domestic research and development (R&D) expensing. 32 Alaska does authorize local governments to levy their own sales taxes, however, which is reflected in the state’s sales tax component score. Alabama and Louisiana have the highest average local option sales taxes (5.29 and 5.12 percent, respectively), and in both states the average local option sales tax is higher than the state sales tax rate. Other states with high local option sales taxes include Colorado (4.91 percent), New York (4.53 percent), and Oklahoma (4.50 percent). The top-earning 20 percent of taxpayers are dominated (85 percent) by married couples. This same 20 percent also has the highest concentration of business owners of all income groups.26 Because of these concentrations, marriage penalties have the potential to affect a significant share of pass-through businesses.
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- 19 Some states offer tax credits in lieu of standard deductions or personal exemptions.
- States with the highest capital stock tax rates include Connecticut (0.341 percent), Arkansas and Louisiana (0.3 percent), Massachusetts (0.26 percent), Tennessee (0.25 percent), and Mississippi (0.225 percent).
- Since a high percentage of property taxes are levied at the local level, there are countless jurisdictions.
For all readers, we hope that this refreshed publication, the 2025 State Tax Competitiveness Index, will serve as a useful guide for navigating state tax policy. It ranks, both overall and across five subindices—individual income taxes, corporate taxes, sales, use, and excise taxes, property and wealth taxes, and unemployment insurance taxes—how states compete, and where each has room to improve. And for would-be reformers, our datasets (now much more accessible!) are an invaluable guide to how states structure their tax codes, and where they diverge—for good and for ill—from their peers.
Nevada’s payroll tax does not apply to capital income, and thus scores perfectly on this measure, along with states that forgo all income taxation. On January 1, 2024, Georgia will transition from a graduated individual income tax with a top rate of 5.75 percent to a flat tax structure with a rate of 5.49 percent. 1437, enacted in April 2022, the rate could decrease to 4.99 percent by January 1, 2029, if certain revenue conditions are met, paired with substantial increases in personal exemptions.
Other economists have found that taxes on specific products can produce behavioral results similar to those that were found in these general studies. For example, Fleenor (1998) looked at the effect of excise taxAn excise tax is a tax imposed on a specific good or activity. Differentials between states on cross-border shopping and the smuggling of cigarettes. Moody and Warcholik (2004) examined the cross-border effects of beer excises.
The Index does not purport to measure economic opportunity or freedom, or even the broad business climate, but rather the narrower business tax climate, and its variables reflect this focus. We do so not only because the Tax Foundation’s expertise is in taxes, but because every component of the Index is subject to immediate change by state lawmakers. It is by no means clear what the best course of action is for state lawmakers who want to thwart crime, for example, either in the short or long term, but they can change their tax codes now. Contrary to Fisher’s 1970s view that the effects of taxes are “small or non-existent,” our study reflects strong evidence that business decisions are significantly impacted by tax considerations.
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