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New Report Ranks States on Tax Policy Small Business Friendliness

By Raymond J. Keating, chief economist for the Small Business & Entrepreneurship Council, as originally featured on SBE Council 

Taxes impact small businesses year-round, and state lawmakers are continually making changes to either lift tax burdens or make them heavier for entrepreneurs, so let’s take a look at how the states rank in terms of their tax policy climates.

The Small Business & Entrepreneurship Council just published the “Small Business Policy Index 2019: Ranking the States on Policy Measures and Costs Impacting Small Business and Entrepreneurship.” The Index ranks the states according to 62 different measures capturing government-imposed or related costs that impact small business, entrepreneurship and investment.

Among those 62 measures are 26 tax or tax-related factors. Pulling those measures together, SBE Council has broken out the “Small Business Tax Index 2019,” which ranks the states as to how friendly or unfriendly their tax systems are toward small business, entrepreneurship and investment.

As noted in the report:

The 26 measures are: 1) state’s top personal income tax rate, 2) state’s top individual capital gains tax rate, 3) state’s top tax rate on dividends and interest, 4) state’s top corporate income tax rate, 5) state’s top corporate capital gains tax rate, 6) any added income tax on S-Corporations, 7) any added income tax on LLCs, 8) Section 179 expensing conformity, 9) average local personal income tax rate, 10) whether or not the state imposes an alternative minimum tax on individuals, 11) whether or not the state imposes an alternative minimum tax on corporations, 12) whether or not the state’s personal income tax brackets are indexed for inflation, 13) whether or not the state’s corporate income tax brackets are indexed for inflation, 14) the progressivity of the state’s personal income tax brackets, 15) the progressivity of the state’s corporate income tax brackets, 16) property taxes, 17) consumption- based taxes (i.e., sales, gross receipts and excise taxes), 18) whether or not the state imposes a death tax, 19) unemployment taxes, 20) whether or not the state has a tax limitation mechanism, 21) whether or not the state imposes an Internet access tax, 22) remote seller taxes, 23) gas tax, 24) diesel tax, 25) wireless taxes and 26) LLC fees.

Why each measure is included is explained in the study. But the fundamental points come down to higher tax rates and burdens raising costs for small businesses, entrepreneurs and investors, and disincentivizing risk taking—namely, entrepreneurship and investment—critical to economic, income and job growth.

In the Index, we cite an assortment of economic studies that further explain why assorted tax measures matter. For example:

In a 2008 study, Barry W. Poulson and Jules Gordon Kaplan, both economics professors at the University of Colorado, Boulder, looked at the impact of taxes on economic growth in the states from 1964 to 2004. They found “a significant negative impact of higher marginal tax rates on economic growth.” Specifically: “The evidence supports previous studies that find a significant negative impact of higher marginal tax rates on state economic growth. Further, the evidence shows that states with higher marginal income tax rates appear to be at a disadvantage in achieving higher rates of economic growth.” And in the conclusion, they noted: “The analysis reveals that higher marginal tax rates had a negative impact on economic growth in the states. The analysis also shows that greater regressivity had a positive impact on economic growth. States that held the rate of growth in revenue below the rate of growth in income achieved higher rates of economic growth. The analysis underscores the negative impact of income taxes on economic growth in the states. Most states introduced an income tax and came to rely on the income tax as the primary source of revenue. Jurisdictions that imposed an income tax to generate a given level of revenue experienced lower rates of economic growth relative to jurisdictions that relied on alternative taxes to generate the same revenue.”

For good measure: In a 2004 National Bureau of Economic Research study, economists William M. Gentry and R. Glenn Hubbard reported, “Interest in the role of entrepreneurial entry in innovation raises the question of the extent to which tax policy encourages or discourages entry. We find that, while the level of the marginal tax rate has a negative effect on entrepreneurial activity, the progressivity of the tax also discourages entrepreneurship, and significantly so for some groups of households.”

So, which states rank best and worst according to the “Small Business Tax Index 2019”?

The 15 best state tax systems according to the “Small Business Tax Index 2019” are:

1) Texas
2) South Dakota
3) Nevada
4) Wyoming
5) Florida
6) Washington
7) Ohio
8) Colorado
9) Alaska
10) Alabama
11) Arizona
12) North Carolina
13) Michigan
14) Indiana
15) Tennessee

The 15 worst state tax systems are:

36) Rhode Island
37) Illinois
38) Arkansas
39) Maryland
40) Nebraska
41) Connecticut
42) Maine
43) Oregon
44) New York
45) Vermont
46) Iowa
47) Minnesota
48) Hawaii
49) California
50) New Jersey

It must be pointed out that among the top six states, five (Texas, South Dakota, Nevada, Wyoming and Washington) do not impose any individual and corporate income or capital gains taxes, and the sixth (Florida) inflicts no individual income or capital gains taxes. Now, that is pro-small-business, pro-entrepreneur, pro-investment and pro-growth tax policymaking.

Click here to view the original article.