by Howard Stephenson
Utah‘s Business Climate ranks 26th among the 50 states according to the national Tax Foundation’s recent State Business Tax Climate Index. The study ranks the “business tax friendliness,” of each state using five factors: 1) Corporate Income Taxes, 2) Individual Income Tax, 3) Sales and Gross Receipts Tax, 4) Unemployment Insurance Tax, 5) Fiscal Balance, which includes tax collections per capita, and as percent of personal income, and tax and expenditure controls. Generally the index rewards tax codes that are neutral, have low and flat rates, are simple and transparent, avoid double taxation, and have statutory or constitutional restraints that keep tax burdens low over time.
Utah ranked 8th best in corporate income tax and 42nd in individual income tax. Utah ranked in the middle of the pack on sales and gross receipts tax, unemployment insurance, and fiscal balance.
The goal of the index is to help focus lawmakers on good-tax fundamentals in their states, rather than short-term tax boondoggles that temporarily lure jobs from other states. “The temptation is for state lawmakers to lure high-profile companies from other states with packages of tax bonuses,” said Scott Hodge, who co-authored the study. “But that strategy can backfire.” For example, in 1996 Florida lawmakers lured a major credit card company to open a call center with a generous $3 million tax refund package. Just eight years later lawmakers were shocked at the announcement that the company was closing the Tampa call center and laying off 1,100 workers. “Florida’s experience shows preferential tax bonuses don’t guarantee jobs will stay permanently,” said Hodge. “Often they mask deeper flaws in state taxes, and the index helps draw those to lawmakers’ attention.”
According to the study, many of Utah’s neighbors are leading the nation in creating a tax friendly business climate. Three of Utah’s immediate neighbors Nevada, Wyoming, and Colorado all ranked in the top ten. Other western states in the top ten were Oregon and Washington.
The Ten Best and Ten Worst Business Tax Climates
Here are the states, starting with the highest ranking, which the Tax Foundation say have the ten best business tax climates: South Dakota, Florida, Alaska, Texas, New Hampshire, Nevada, Wyoming, Colorado, Washington, and Oregon.
The common characteristic? Almost all the best states don’t have at least one of the three major state taxes—sales taxes, personal income taxes and corporate income taxes. Five of the top 10—Alaska, Nevada, South Dakota, Washington and Wyoming—have only enacted one of the three.
In contrast, the ten worst business tax climates, starting with the worst, are: Hawaii, New York, Minnesota, West Virginia, Rhode Island, Vermont, Kentucky, Arkansas, Maine, and Wisconsin,
Generally the worst states have complex, multi-rate corporate and individual income tax codes that impose above-average tax rates, above-average sales tax rates that don’t exempt business inputs, complex, high-rate unemployment tax systems, and high overall state tax collections with few tax or expenditure controls.“The ideal tax system, whether at the state, federal, or international level, should be neutral to business activity,” said Mr. Hodge. “In such a system, people would base their economic decisions on the merits of the transactions rather than the tax implications.” The bottom line? Tax systems are not created equal, and that makes competition between them inevitable. Lawmakers who ignore interstate tax competition and focus on outsourcing fears instead do so at their peril. “The index offers a guide to states on becoming more competitive,” said Hodge. “But implementing it may well require state tax reform.” As budget surpluses build in coming years, watch for pressure on state lawmakers to improve tax climates to build as well.
The study points out two rules state lawmakers should keep in mind while addressing their tax policies: 1) Taxes affect business decisions, job creation, and job retention. Businesses see taxes as input costs that are passed along either to the customer in higher priced goods, or to the worker through lower wages. 2) Every tax law will in some way change that state’s competitive position with other states.
Lawmakers cannot control every factor that affects the state’s business climate, such as geographic location, available natural resources, and access to waterways and ports. But lawmakers do have control over how friendly their tax climate is, which can make their state more attractive to businesses. Some of the features of Governor Walker’s tax reform proposal would produce significant improvements in Utah’s Tax Climate Ranking.
The full study, “2004 State Business Tax Climate Index” is available at www.taxfoundation.org .