States Moving in the Right Direction on Taxes

By SBE Council at 20 April, 2015, 2:39 pm

by Raymond J. Keating-

Tax Day is behind us for 2015, but the burden of taxes is with us everyday of the year. Few understand this better than small business owners.

And it’s not just federal taxes that are a burden, but also levies imposed at the state and local levels. Those taxes certainly affect decisions as to where entrepreneurs start up enterprises; where businesses locate, move and build; and where investors choose to take risks.

And state and local tax burdens are the focus of the Small Business Tax Index 2015: Best to Worst Tax Systems for Entrepreneurship and Small Business. The Index pulls together 23 different tax measures, and combines those into one tax score that allows the 50 states to be compared and ranked. Among the taxes included are income, capital gains, property, death, unemployment, and various consumption-based taxes, including state gas and diesel levies.

According to this year’s index, the 15 best state tax systems are: 1) South Dakota, 2) Nevada, 3) Texas, 4) Wyoming, 5) Washington, 6) Florida, 7) Alabama, 8) Colorado, 9) Ohio, 10) Alaska, 11) Arizona, 12) Indiana, 13) Michigan, 14) Utah, and 15) North Dakota.

Meanwhile, the 15 worst state tax systems are: 36) Maryland, 37) Delaware, 38) Rhode Island, 39) Idaho, 40) Nebraska, 41) Connecticut, 42) Oregon, 43) Vermont, 44) Maine, 45) New York, 46) Iowa, 47) Hawaii, 48) Minnesota, 49) New Jersey, and 50) California.

States Cutting Taxes

Constructively, when looking at income tax rates compared to the previous year’s report, nine states implemented reductions. Arizona, New Mexico and Rhode Island cut their corporate income and capital gains tax rates. Arkansas, Kansas, and Massachusetts reduced individual income and capital gains tax rates. And Illinois, Indiana, and North Carolina cut individual and corporate income and capital gains tax rates. Those are all positives for entrepreneurs, small businesses and investors, and for the states’ economies and competitiveness.

Phony Tax Reform

Meanwhile, under the guise of tax reform and supposedly providing relief, New York managed to stand out in a bad way as the corporate income tax rate on downstate businesses actually increased this year compared to last. Will New York ever get it?

More Tax Relief Ahead?

Looking ahead, there’s more tax relief scheduled in several states. For example, if revenue targets are hit, the corporate income and capital gains tax rate in North Carolina will decline from 5 percent to 4 percent in 2016 and to 3 percent in 2017. And in Kansas, the state personal income, capital gains and dividend/interest tax rates will eventually decline to 3.9 percent in 2018. In addition, Arizona’s state corporate income and capital gains tax rate will be phased down to 4.9 by 2016. Also, the state corporate income and capital gains tax rate in Indiana will fall to 6.5 percent in mid-2015. And lastly in New Mexico, the state corporate income and capital gains tax rate is scheduled to be phased down to 5.9 percent in 2018.

Obviously, a great deal of work lies ahead in reducing tax burdens on businesses and workers, especially in the states ranking poorly on the Index. But as we’ve seen, there are examples of states doing the smart thing from a tax and economy perspective. Now, we just need to get politicians across the nation, at the local, state and federal levels, to get onboard with pro-growth tax reforms and relief.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP: Protecting Intellectual Property, Driving Entrepreneurship and it is available free on SBE Council’s website here.