Small Business Tax Index 2014

Raymond Keating
Raymond Keating

So, how does your state stack up when it comes to imposing tax burdens relating to entrepreneurship, small business and investment?

The Small Business & Entrepreneurship Council just published the Small Business Tax Index 2014, which ranks the 50 states based on 21 different tax measures, including income-based tax rates, property and consumption-based tax burdens, death taxes, unemployment levies and energy taxes.

Which states rank best? The top 10 best state tax systems, in descending order, are those those in Nevada, South Dakota, Texas, Wyoming, Washington, Florida, Alabama, Ohio, Colorado and Alaska.

A few key points are worth noting about these states.

To start, the top five states impose no income-based taxes whatsoever — that is, no personal or corporate income and capital gains taxes or individual taxes on interest and dividends. For good measure, Florida and Alaska impose no personal income and individual capital gains taxes or individual taxes on interest and dividends. Ohio has no corporate income and capital gains levies. And Alabama has the lightest property tax burden. In addition, nine of the top 10 states (except Washington) impose no state death taxes.

Which states rank worst? They are, in ascending order, Connecticut, Oregon, Vermont, Maine, New York, Iowa, Hawaii, New Jersey, Minnesota and California.

These states impose substantial and numerous tax burdens, including high income-based taxes nearly across the board. Nine of the 10 states impose death taxes.

The bottom-10 states obviously have a great deal of work to do in making their tax systems more competitive. But the top-10 states can’t afford to lose competitiveness and should be looking to make further improvements. Standing pat, even for those ranked best, really is not an option, especially given the tax woes at the federal level.

Some states have made changes to their tax systems that have resulted in substantive improvements in their competitive positions. As highlighted in the Small Business Tax Index 2014, Kansas is in the midst of phasing down its individual income and capital gains tax rates. Arizona, Indiana and New Mexico are reducing corporate income and capital gains levies.

But the big story in state tax reform of late comes from North Carolina.

On the 2013 index, the state ranked 38th, or 13th worst. But on the 2014 Small Business Tax Index, North Carolina ranks 22nd.

Why the improvement? A major tax reform effort. First, the top personal income, capital gains and dividend/interest tax rate dropped from 7.75 percent to 5.8 percent. Second, the corporate income and capital gains tax rate declined from 6.9 percent to 6 percent. Third, the state death tax was fully repealed.

That’s a dramatic, positive shift in tax policy in North Carolina. There’s more to come as the personal income, capital gains,and dividend/interest tax rate is scheduled to drop to 5.75 percent next year, with the corporate income and capital gains tax rate also declining to 5 percent. For good measure, if revenue targets are hit, the corporate tax rate would then decline to 4 percent in 2016 and to 3 percent in 2017.

What does North Carolina tell us? North Carolina says that if your state ranks poorly on the Small Business Tax Index, all is not lost. Real change and improvement is possible. All that’s needed is the economic wisdom to understand the ills of high taxes and the political will and leadership to do something about it.