Best States for Business?

Wyoming has the best, New Hampshire ranks ninth, and New Jersey has the worst tax system. The tax systems were rated according to business friendliness by the Tax Foundation's recently completed 2009 State Business Tax Climate Index, a ranking of the 50 state tax systems that provides a roadmap for state lawmakers concerned with keeping their states tax-competitive.

Keeping a state competitive in today's global marketplace can be difficult, but there is one factor lawmakers have direct control over: the quality of state tax systems. The Index measures how well a state's tax system encourages investment by maintaining a broad tax base and low rates.

The modern market is characterized by mobile capital and labor. Therefore, companies will locate where they have the greatest competitive advantage, says Tax Foundation Staff Economist Joshua Barro, the study's author. States with the best tax systems will be the most competitive in attracting new businesses and most effective at generating economic and employment growth.

The Index, published yearly by the Tax Foundation since 2003, ranks states based on the taxes that matter most to businesses and business investment: corporate tax, individual income tax, sales tax, unemployment tax and property tax. States are scored on these taxes, and the scores are weighted based on the relative importance or impact of the tax to a business.

The top 10 states in the Index, from 1st to 10th, are Wyoming, South Dakota, Nevada, Alaska, Florida, Montana, Texas, New Hampshire, Oregon, and Delaware. The bottom ten states, from 41st to 50th, are Minnesota, Nebraska, Vermont, Iowa, Maryland, Rhode Island, Ohio, California, New York and New Jersey.

Barro urges states to constantly be on the lookout for ways to improve their business tax climates. If they stand still, they lose ground to states actively improving their climates.

States do not enact tax changes (increases or cuts) in a vacuum, Barro explains. Every tax law will in some way change a state's competitive position relative to its immediate neighbors, its geographic region, and even globally. Entrepreneurial states can take advantage of the tax increasing of their neighbors to lure businesses out of high-tax states.

The Index can be found at www.taxfoundation.org.

The Tax Foundation is a nonpartisan, nonprofit organization that has monitored fiscal policy at the federal, state and local levels since 1937.