The Best and Worst States for Business Tax Climate that may Influence Your Next Site Selection Decision

Corporate tax issues have been the center stage this year as President Trump has implemented sweeping federal tax reform in the United States. Despite these federal changes, it remains critical to evaluate state tax conditions during the site selection process to identify a tax-friendly location for your company. This applies to a variety of operation types including headquarters, call centers, data centers, distribution centers, manufacturing plants and other type of operations that may be impacted by state taxes. The typical tax factors to consider at the macro level include corporate tax, income tax, property tax, unemployment insurance rates and sales taxes.

To help you stay on top of the latest business tax conditions, The Tax Foundation has been one of our more reliable resources that monitors and ranks state tax conditions in the United States. In its “2018 State Business Tax Climate Index,” the foundation identifies the best and worst states based on business tax climate and identified some key trends that you may want to be aware of.

How tax conditions impact the site selection process

During the site selection process, start by asking if there are any states that you need to avoid. You will often find that your tax department or human resources may have a list states with high tax burdens or difficult labor laws, especially if it is an employee-intensive operation such as a call center or manufacturing plant. Another factor to consider is the sales tax rate, especially in e-commerce operations such as distribution centers. Property taxes are another critical factor for manufacturing plants and data centers that have a significant amount of personal property. Bottom-line, you need to be aware of states with excessive business tax rates of any type so those states can get eliminated early in the site selection process unless there is some overriding factor that is critical to your business.  

Economic incentives can offset tax implications

Economic incentives are a great, but often dangerous, way to offset your tax obligations especially in states with excessive tax rates. Economic incentives have been used for decades to help level the playing field between low and high tax states competing for a project. A great example is a high-profile manufacturing project that we recently located in Georgia. SSG was able to negotiate 10-years’ worth of property tax abatements and useable credits — saving the client $3.5 million. Similarly, in Kentucky we were able to use the state’s payroll withholding tax as a cash refund that brought down the effective labor rate by almost 50 cents per hour. This is a huge amount of money for people-intensive operations such as a headquarters, call center or manufacturing plant with 500 or more employees. Another great example involves our retail projects where we negotiate sales-tax-sharing rebates whereby the city’s portion of the sales tax is rebated back to our clients. Regardless of the economic incentive program, it is critical to understand the long-term tax liabilities after the economic incentives have burned off.

The top 10 states with the best business tax conditions

While all states have property taxes and unemployment insurance taxes, the top ranked states typically lack corporate income tax, individual income tax or sales tax. Some good examples are Wyoming, Nevada and South Dakota which have no corporate or individual income tax; Alaska has no individual income or state-level sales tax; Florida has no individual income tax; and New Hampshire, Montana and Oregon have no sales tax.

Based on the results of the Tax Foundation’s latest ranking, the following 10 states have been identified to have the best overall business tax climate:

1. Wyoming
2. South Dakota
3. Alaska
4. Florida
5. Nevada
6. Montana
7. New Hampshire
8. Utah
9. Indiana
10. Oregon

10 states with the worst ranked business tax conditions

The lowest ranked business climates are in states with complex, non-neutral taxes with comparatively high rates. As an example, New Jersey has some of the country’s highest property tax burdens, is one of two states that has both an inheritance tax and an estate tax, and has some of the worst individual income taxes in the country.

The 10 worst ranked states were:

40. Rhode Island
41. Louisiana
42. Maryland
43. Connecticut
44. Ohio
45. Minnesota
46. Vermont
47. California
48. New York
49. New Jersey

 How the rest of the states compared

The following interactive diagram provides a summary of how the rest of the states compared in the study.  (Please move your mouse over each state to see their ranking.)

Note: A rank of 1 is best, 50 is worst. Rankings do not average to the total. States without a tax rank equally as 1. DC’s score and rank do not affect other states. The report shows tax systems as of July 1, 2017 (the beginning of Fiscal 2017).

Source: Tax Foundation

Conclusions

Despite the rankings of 2017 being roughly in line with 2016, it continues to be critical to monitor changing tax structures as they may impact your site selection decisions. The ever-changing political landscape will continue to cause the movement in state rankings so it is important to keep up to date on business tax climate factors during the site selection process.