The Tax Foundation, a respected national tax policy research group, released its annual report ranking the business tax climate in the 50 states. As it has in the past, the group gives Washington generally high marks. This year, the state comes in No. 7, up one from last year's 8th place ranking.
Here's the TF news release, blog post, and full study.
Although we've been critical of the TF methodology in the past (see here, for example), we believe the study provides an abundance of good information about state tax policy and its impact on business. Moreover, they have consistently improved their methodology. Our criticism focuses on two issues:
- It's not clear to us that it is possible to rank states fairly on a single business tax climate index. There's simply too much variation in how tax policy treats different sectors for the ranking to be as clean as most analysts would like.
- The TF methodology gives extraordinary weight to income tax issues. The top 10 states in this year's ranking are, in order, Wyoming, South Dakota, Nevada, Alaska, Florida, New Hampshire, Washington, Montana, Texas and Utah.
TF explictily accepts the charge of overweighting the absence of a major tax.
It is obvious that the absence of a major tax is a dominant factor in vaulting many of these 10 states to the top of the rankings. Property taxes and unemployment insurance taxes are levied in every state, but there are several states that do without one or more of the major taxes: the corporate tax, the individual income tax, or the sales tax.
Several of these states, including Washington, have also been high growth states. As noted in our analysis of Initiative 1098, states with steep progressive income tax rates have been substantial losers in the competition for jobs and investment. In that policy brief, we cited the 2010 TF report,
No matter what the average rates are, the high marginal rates will affect the state’s position in several prominent national business climate rankings. Washington ranks 9th best in the Tax Foundation’s 2010 State Business Tax Climate Index. The overall index bends five major components indexes: corporate tax, individual income tax, sales tax, unemployment insurance tax and property tax. Washington ranked 33rd, 1st, 50th, 26th, and 21st respectively in these components. The state’s high overall ranking was largely dueto the lack of an income tax, which resulted in the “number one” ranking in that component.
This year, we rank 30th in corporate tax, 1st in individual income tax, 48th in sales tax, 18th in unemployment insurance and 22nd in property tax.
It's important to read the Tax Foundation report as one useful barometer of business tax climate. Another, complementary, approach is taken by the Council on State Taxation. We reported on the COST business tax study in a blog post last summer. The crux:
COST finds that state and local business taxes in Washington amount to 5.4 percent of Gross State Product, significantly higher than the US average of 5.0 percent.
In my column this morning, I write about legislative proposals for a new personal and business income tax, a capital gains tax, and extending the sales tax to personal and professional services. Each of these proposals would exert a drag on our business tax climate. I'll not go into detail here. Please read the column. I should note this finding from the TF report:
States with the worst scores on the [sales tax] are Hawaii, New Mexico, Washington, South Dakota and North Carolina. Their tax systems hamper economic growth by including too many business inputs, excluding too many consumer goods and services, and/or excessive rates of excise taxation.
Keep that in mind when you hear charges of "excessive" use of tax incentives in this state.
We and others have been critical of business taxes here. There's room for improvement. And there are some things we're getting right. It would be a tragic mistake to use the good news to promote bad business tax proposals.
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