howardnlby Howard Stephenson
Two weeks ago I reported in this column that Utah ranks 27th among the fifty states and the District of Columbia in the Seventh Annual Small Business Survival Index. The SBSI ranks the fifty states and District of Columbia using 20 indicators including 13 tax-related factors, electrical rates, health care rates, crime rates, and several government mandates on businesses; all indicators of how state and local governments treat small businesses and entrepreneurs.

State Business Tax Climate Index

Now comes the State Business Tax Climate Index from the Tax Foundation of Washington, D.C., which ranks Utah a dismal 34th place among the states. One of the main standards of the Business Tax Climate Index is tax neutrality. If a state’s tax system maintains a “level playing field” for all types of businesses and business transactions, the Tax Foundation considers it neutral and rates it highly. The Foundation believes an economically neutral tax system benefits and punishes all businesses equally, so this index is a measure of each state’s tax friendliness to all business activity, not just small businesses, or large businesses, capital-intensive or service-intensive, existing companies or start-ups. Tax neutral states produce economic efficiency, producing more jobs and higher incomes for everyone, as opposed to states whose policymakers try to “play god” with their economies by granting special preferences to some businesses at the expense of all others, as if they could magically control the marketplace.

Similar to the previously reported Small Business Survival Index, the Beehive State’s poor 34th place ranking on this new Small Business Tax Climate Index compares unfavorably with the states surrounding Utah. Wyoming ranks first place while Nevada and Colorado rank 3rd and 4th respectively. Arizona ranks 17th and New Mexico comes in 29th. Idaho ranks only slightly better than Utah at 33rd.

The top ten states in the ranking in order of favorable business tax climate are Wyoming, New Hampshire, Nevada, Colorado, Alaska, South Dakota, Florida, Washington, Oregon, and Tennessee. The bottom ten states in order of worst business tax climate are Mississippi, California, Arkansas, Ohio, Nebraska, Hawaii, New York, Maine, Minnesota, and Louisiana.

The overall SBTC Index is a composite of five specific factors devoted to major features of a state’s tax system, features that definitely influence business decisions or the economy in general. These include the corporate income tax, the individual income tax, the sales and gross receipts tax, the state’s fiscal balance, and the administrative complexity of the state’s tax system as measured by its conformity with other systems. The five indexes are comprised of several sub-indexes.

Corporate Income Taxes – Utah ties with eight other states for 5th best.

The first of the major indexes measures each state’s corporate income tax. In measuring this impact, the Tax Foundation examined four aspects of each state’s corporate income tax code: the top corporate tax rate, the level of taxable income at which the top tax rate kicks in, the number of brackets, and the average width of the brackets. Four states have no corporate income tax: Nevada, South Dakota, Washington, and Wyoming.

Utah’s tie for 5th place is due to a relatively low, single-rate system that establishes a comparatively neutral environment for business activity.

Individual Income Taxes – Utah receives a miserable 43rd place ranking.

This tax is important for business because labor constitutes a majority of a business’s total costs, so anything that hurts employees also affects business decisions. Second, individual income taxes are important because a significant number of businesses, including sole proprietorships, partnerships, and S-Corporations report their income through the individual income tax. Seven states have no individual income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.

Utah’s poor showing is due to its relatively high top rate of 7% which kicks in at a low $8,200 level. Utah is also rated low because its income tax involves six narrow brackets. I believe this index would be improved if it considered adjustments to income such as deductibility of federal taxes paid.

Sales and Gross Receipts Taxes – Utah receives a ranking of 26th place.

This index is comprised of two sub-indexes, the rate itself and five common categories of business-to-business transactions that may or may not be exempted: agricultural products, services, machinery, computer software, and items leased or rented to businesses. The Utah Taxpayers Association has worked for years with limited success to convince the legislature to eliminate sales taxes on business purchases because of their negative effect on business startups, expansions, and even business continuation as replacement equipment and parts are taxed. Five states impose no sales taxes: Alaska, Delaware, Montana, New Hampshire, and Oregon. One flaw I see with this index is that it does not include local sales taxes in the ranking.

Utah’s ranking of 26th is due to our middle-of-the-pack tax rate and exemption of some business inputs from sales taxes. We were marked down for not exempting services to personal property and for not exempting sales of rooms & lodging, motor vehicles, and other tangible personal property.

Fiscal Balance Index – Utah ranks poorly at 43rd place.

The Fiscal Balance Index measures both the current tax burden of each state as a percent of total personal income and the likelihood of future tax law changes as indicated by whether tax revenues have grown faster than personal income over ten years. States which rank most favorably on this index are New Hampshire, Alaska, Oregon, Texas and Tennessee.

Utah ranks poorly on this index because our taxes are ninth highest relative to personal income and our taxes have grown faster than personal income since 1992.

Tax Base Conformity Index – Utah ranks 23rd among the fifty states.

This index measures the degree to which each state’s tax system conforms to other tax systems, especially the federal tax system. This is important because many businesses operate in more than one state and compliance with unique tax rules and definitions is costly. This index is made up of five sub-indexes: Whether the state imposes the punitive alternative minimum tax (Utah does not), state recognition of LLCs and S Corporations (Utah does), allowance of consolidated filings (Utah does not), linkage to the IRS Code (Utah is linked), and compliance with the Uniform Division of Income for Tax Purposes Act (Utah complies), and the Multi-state Tax Commission (Utah has partial compliance).

Business Taxes Really Do Matter

The Tax Foundation’s review of economic literature over the past 50 years shows that national economists generally agree that there have been three distinct periods relating to the effects of state and local taxes on business decisions. During the first period – which included the decades of the 50s, 60s, and 70s – the economic literature suggested that state and local taxes did not influence business location.

The second period occurred in the early- to mid-1980s and included the Reagan tax cut in 1981 and a dramatic reform of the tax code in 1986. The economic literature of the time revealed a growing influence of state tax policy on business location decisions.

The third period occurred in the late-80s and early-90s. Multiple economic studies revealed that taxes have an increasingly significant effect on both business location decisions and consumer cross-border shopping and even smuggling. These conclusions are bolstered by more sophisticated economic tools that were not previously available.

“In short, the latest word from the tax literature is this: taxes matter a great deal to business,” the Tax Foundation said.

How Can Utah Improve Its Business Climate?

Utah can improve its business tax climate by doing three things that have been advocated by the Utah Taxpayers Association in recent years: (1) index its individual income tax for inflation, (2) eliminate sales taxes on remaining non-exempt business purchases including manufacturing equipment and parts with a three-year life or less, and (3) amend its spending limitation law to prevent government revenues from growing faster than the personal income of its citizens.

The entire report can be found on the web at .