The TaxA tax is a compulsory fee or cost collected by native, state, and nationwide governments from people or companies to cowl the prices of normal authorities companies, items, and actions. Basis’s State Tax Competitiveness Index permits policymakers, taxpayers, and enterprise leaders to see how their states’ tax programs measure up throughout a variety of tax measures. Whereas there are various methods to point out how a lot state governments gather in taxes, the Index evaluates how nicely states construction their tax programs and offers a street map for enchancment.

The Tax Basis has printed this examine, beforehand known as the State Enterprise Tax Local weather Index, since 2003. Final 12 months, we up to date the methodology to extra comprehensively handle a spread of rising tax points. As with every methodological modifications, we apply them to prior years as nicely to permit for an apples-to-apples comparability throughout years. Presently, backcasting underneath the brand new methodology stretches again to fiscal 12 months 2020 (July 1, 2019).

Within the spirit of change and enchancment, it’s value wanting again to see which states have really embraced tax competitiveness since 2020, and which of them have lagged behind.

The 5 states that noticed the most important enhancements of their rank over the past six years are:

1. Tennessee, which ranked 38^th in 2020, now ranks 8^th.
2. Iowa, which ranked 43^rd in 2020, now ranks 17^th.
3. Georgia, which ranked 28^th in 2020, now ranks 18^th.
4. Louisiana, which ranked 40^th in 2020, now ranks 31^st.
5. Arkansas, which ranked 41^st in 2020, now ranks 34^th.

The 5 states that fell the furthest within the rankings within the final six years are:

1. Oregon, which ranked 8^th in 2020, now ranks 35^th.
2. Washington, which ranked 33^rd in 2020, now ranks 45^th.
3. Colorado, which ranked 22^nd in 2020, now ranks 33^rd.
4. New Mexico, which ranked 20^th in 2020, now ranks 28^th.
5. Massachusetts, which ranked 36^th in 2020, now ranks 43^rd.

Highlighting the Good

Amidst a country-wide flat tax revolution, the states that noticed the best Index rating enhancements consolidated their particular person earnings taxA person earnings tax (or private earnings tax) is levied on the wages, salaries, investments, or different types of earnings a person or family earns. The U.S. imposes a progressive earnings tax the place charges improve with earnings. The Federal Revenue Tax was established in 1913 with the ratification of the sixteenth Modification. Although barely 100 years previous, particular person earnings taxes are the most important supply brackets and decreased charges throughout a number of main taxes, making their tax codes extra enticing to companies and people alike.

Tennessee decreased the charges of its company gross receipts taxGross receipts taxes are utilized to an organization’s product sales, with out deductions for a agency’s enterprise bills, like compensation, prices of products offered, and overhead prices. Not like a gross sales tax, a gross receipts tax is assessed on companies and applies to transactions at each stage of the manufacturing course of, resulting in tax pyramiding., improved its therapy of enterprise expensing, and absolutely phased out its tax on particular person curiosity and dividends earnings, changing into one in every of eight states to don’t have any particular person earnings tax.

Iowa has been working towards complete tax reform for a number of years, and its dedication is paying off. Since our 2020 rating, the state repealed its various minimal tax, decreased its prime company earnings taxA company earnings tax (CIT) is levied by federal and state governments on enterprise income. Many corporations are usually not topic to the CIT as a result of they’re taxed as pass-through companies, with earnings reportable underneath the person earnings tax. fee from 12 p.c to 7.1 p.c, and consolidated 4 brackets into two. On the person facet, the state decreased its prime earnings tax fee from 8.53 p.c in 2019 (and eight.98 p.c earlier than reforms adopted in 2018) to a extremely aggressive 3.8 p.c and transformed a nine-bracket system to a flat taxAn earnings tax is known as a “flat tax” when all taxable earnings is topic to the identical tax fee, no matter earnings degree or property..

Georgia efficiently turned its graduated particular person earnings tax right into a flat 5.19 p.c tax. On the similar time, it tied its company earnings tax fee to the person fee, lowering it from 5.75 to five.19 p.c, whereas adopting different reforms.

Louisiana, too, has been working towards complete tax reform for a few years. For the reason that 2020 rating, the state has eradicated its uncompetitive throwout rule and its coverage of federal deductibility, decreased its company franchise tax fee, introduced down the person earnings tax fee from 6 p.c to three p.c, and consolidated 5 company earnings tax bracketsA tax bracket is the vary of incomes taxed at given charges, which generally differ relying on submitting standing. In a progressive particular person or company earnings tax system, charges rise as earnings will increase. There are seven federal particular person earnings tax brackets; the federal company earnings tax system is flat. into one, with a prime fee discount from 8 to five.5 p.c. Louisiana can also be one in every of three states to undertake everlasting full expensingFull expensing permits companies to instantly deduct the total price of sure investments in new or improved know-how, gear, or buildings. It alleviates a bias within the tax code and incentivizes corporations to speculate extra, which, in the long term, raises employee productiveness, boosts wages, and creates extra jobs. separate from federal provisions.

Arkansas noticed fee reductions and bracket consolidation as nicely. Lawmakers decreased the company and particular person earnings tax charges from 6.5 and 6.9 p.c to 4.3 and three.9 p.c, respectively. The company earnings tax now options solely 4 brackets, and the person earnings tax has solely two, whereas each beforehand had six. The state additionally improved its nonresident earnings tax provisions, amongst different reforms.

Studying from the Unhealthy

Oregon adopted a modified gross receipts tax along with its regular company earnings tax. This new tax has comparatively excessive charges, which compounds the tax pyramidingTax pyramiding happens when the identical ultimate good or service is taxed a number of instances alongside the manufacturing course of. This yields vastly totally different efficient tax charges relying on the size of the availability chain and disproportionately harms low-margin companies. Gross receipts taxes are a major instance of tax pyramiding in motion. brought on by typical gross receipts taxes.

Washington beforehand had no earnings tax in any respect, and its particular person earnings tax rank bolstered its general Index rating. Nevertheless, in 2022, the state instituted a tax on particular person capital beneficial properties earnings over $278,000 (with a prime bracket now raised to $1 million), which is now imposed at a fee of 9.9 p.c after a current improve. With out the assistance of a powerful earnings tax rating, the state’s different classes weighed down its general rank, which rapidly plummeted.

Colorado didn’t make the big, unfavorable modifications of the opposite states on this checklist. As a substitute, it demonstrates a cautionary story of resting on laurels at a time when states are actually competing for the very best tax code. Colorado was sitting comfortably at 22^nd on the Index in 2020 due to its comparatively low-rate flat taxes—and the state even decreased its earnings tax fee from 4.5 to 4.4 p.c. Nevertheless, in contrast to different states, Colorado didn’t handle a number of the inefficiencies in its tax code, like its throwback rule and taxation of web CFC-tested earnings (NCTI, previously GILTI). The state has additionally failed to deal with its lack of a uniform gross sales taxA gross sales tax is levied on retail gross sales of products and companies and, ideally, ought to apply to all ultimate consumption with few exemptions. Many governments exempt items like groceries; base broadening, resembling together with groceries, may hold charges decrease. A gross sales tax ought to exempt business-to-business transactions which, when taxed, trigger tax pyramiding.  base and unified administration.

New Mexico bucked the pattern of tax bracket consolidation, as a substitute including extra particular person earnings tax brackets (increasing from 4 brackets to 6), rising its prime fee from 4.9 to five.9 p.c, and rising the highest fee kick-in from $16,000 to $210,000. The state did implement a flat company earnings tax, however did so by eliminating the advantage of a 4.8 p.c decrease fee and leaving an general fee of 5.9 p.c.

Massachusetts, via a 2022 poll measure, modified its flat earnings tax right into a progressive earnings tax by including a prime fee of 9 p.c (in comparison with the earlier fee of 5 p.c) for earnings over $1,000,000. The state additionally enacted a brand new payroll taxA payroll tax is a tax paid on the wages and salaries of staff to finance social insurance coverage packages like Social Safety, Medicare, and unemployment insurance coverage. Payroll taxes are social insurance coverage taxes that comprise 24.8 p.c of mixed federal, state, and native authorities income, the second largest supply of that mixed tax income..

Conclusion

A state’s rating will not be a everlasting label—as a substitute, it’s meant to point out states the place they’ve finished nicely and the place they’ll nonetheless enhance. If state legislators make pro-growth modifications, they’ll bounce up within the rankings, as these states show. And lots of states have finished simply that within the final six years, really prioritizing tax reform in such a manner as to go away behind these states which might be merely standing nonetheless. Each state can profit from a easy, impartial, clear, pro-growth tax construction.

Launch 2026 Index

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