As such, the Index rewards states with the minimum one year required to earn an experience rating and penalizes states that require the full three years. These taxes are levied on employers when a state’s unemployment fund falls below some defined level. Twenty-nine states have a solvency tax on the books, though they fall under different names, such as solvency adjustment tax (Alaska), supplemental assessment tax (Delaware), subsidiary tax (New York), and fund balance factor (Virginia). States are rewarded for each of these exclusions because they nudge a UI system toward neutrality. For instance, if benefit charges were levied for employees who voluntarily quit, then industries with high turnover rates, such as retail, would be hit disproportionately harder.

• However, if repeal extended to property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment.
• For example, some states have their own deductions and exemptions, others use rates based on the federal tax code, while other states don’t allow any deductions or exemptions.
• First, it misunderstands the nature of the corporate income tax, which is imposed on net income (profits).
• The theoretical argument for R&D tax credits is that they encourage the kind of basic research that is not economically justifiable in the short run but that is better for society in the long run.

Types of taxes: A closer look at what you pay

Alternative weighting schemes, such as equal weights or weights based on the revenue-generating importance of a tax, are possible, but sensitivity tests show they produce relatively similar results. For example, the correlation between the actual Index ranks and those using equal weights is about 0.85, with most states in the top 10 and bottom 10 retaining their ranks. However, we believe the current weighting scheme better reflects the importance of tax competition and provides stronger rewards and penalties in areas where competition for human, physical, and financial capital is most intense.

South Carolina

Fisher’s conclusion holds little weight because the five indices serve such dissimilar purposes, and each group has a different area of expertise. Wasylenko’s rejoinder is that policymakers routinely overestimate the degree to which tax policy affects business location decisions and that as a result of this misperception, they respond readily to public pressure for jobs and economic growth by proposing lower taxes. According to Wasylenko, other legislative actions are likely to accomplish more positive economic results because in reality, taxes do not drive economic growth. The more riddled a tax system is with politically motivated preferences, the less likely it is that business decisions will be made in response to market forces.

• Maine has a 5.80% income tax rate, placing it among the states with the highest income tax rates in the US.
• And even in states like New York—in the post-pandemic recovery, perhaps especially in states like New York—tax burdens, and tax structures, matter.
• Gentry and Hubbard found, “While the level of the marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income.
• New Jersey’s 11.5 percent rate (including a temporary and retroactive surcharge) qualifies for the worst ranking among states that levy one, followed by Minnesota’s 9.8 percent rate.
• Check with your state’s tax and revenue authority for further information.
• Ladd was writing in 1998, so her “period three” started in the late 1980s and continued up to 1998, when the quantity and quality of articles increased significantly.

Corporate Tax Base

States with the highest effective rates and therefore the worst scores are Vermont (5.13 percent), Maine (5.09 percent), New Jersey (4.81 percent), New Hampshire (4.64 percent), New York (4.44 percent), and Connecticut (4.07 percent). States that score well with low effective tax rates are Alabama (1.40 percent), Arkansas (1.67 percent), Tennessee (1.74 percent), Oklahoma (1.77 percent), and Louisiana (1.86 percent). The top five states on this subindex—New Hampshire, Delaware, Montana, Oregon, and Alaska—are the five states without a general state sales tax. However, none receives a perfect score because each levies gasoline, diesel, tobacco, and beer excise taxes.

Unemployment Insurance Tax Base

The state sales tax rate is up there at 5.6%, and Arizona cities can level sales taxes as well. The Lone Star State may be one of the most popular options for workers trying to avoid income tax. There’s no income tax in Texas, but residents will have to pony up when it comes to sales tax. Wisconsin has a 3.54% income tax rate, placing it among the states with the highest income tax rates in the US. Vermont has a 3.35% income tax rate, ranking it among the states with the highest income tax rates in the US.

The choice between these systems reflects the state’s financial strategy and the political environment shaped by public opinion and elected officials. Budgetary needs drive the tax rates of each state, funding essentials like schools, roads, and public safety. These requirements regularly prompt state governments to review and adjust tax rates to align with their spending goals. WalletHub released a new study examining which state income tax rates states had the highest and lowest state and local tax rates to determine where residents are giving the most and least money back to their respective governments.

Capital gains taxes

Some states double their single-filer bracket widths for married filers to avoid imposing a “marriage penaltyA marriage penalty is when a household’s overall tax bill increases due to a couple marrying and filing taxes jointly. In a progressive individual or corporate income tax system, rates rise as income increases. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power., while many others do not. Some states tie their standard deductions and personal exemptions to the federal tax code, while others set their own or offer none at all. For example, we find that repealing C-SALT deductions for corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits.

Although he acknowledged potential criticisms of individual studies, he convincingly argued that some systematic flaw would have to cut across all studies for the consensus results to be invalid. In striking contrast to previous reviewers, he concluded that taxes have quite large and significant effects on business activity. In other words, the Wyoming model may not be possible in some states—but the Indiana, Idaho, and North Carolina models are. These states all rank in the top 12 on the Index while imposing all of the major taxes, but at moderate rates with comparatively well-designed tax structures. We also rethought the presentation of the Index’s treasure trove of tax policy information.

Sales, Use, and Excise Taxes

To properly target net income, a corporate income tax, therefore, must involve deductions for costs of doing business, like compensation and the cost of goods sold (COGS). It should also allow deductions for tax costs paid to other jurisdictions, because these too are business costs, not part of a business’s profits. Whereas a personal SALT deduction is a tax preference, the corporate SALT deduction is innate to structure of a tax on net income. Nonetheless, Montana comes in at #5 on the Tax Foundation 2025 State Tax Competitiveness Index.

We use implied tax rates for those states, which account for the nationwide composition of the different components of individual income. The second exception is found in Nevada, where a payroll tax (for purposes other than unemployment insurance) is also included in the individual income tax component. Alaska, moreover, forgoes a state sales tax, but does permit local option sales taxes. While capping C-SALT has superficial appeal in perceived parity with personal limits, it rests on flawed assumptions about the nature of individual and corporate income taxes. The ability to deduct expenses to yield a tax base of corporate profits is intrinsic to corporate net income taxation.

Usually, they are small to medium-sized family-owned businesses where the death of the owner occasions a surprisingly large tax liability. Investment tax credits typically offer an offset against tax liability if the company invests in new property, plants, equipment, or machinery in the state offering the credit. Sometimes, the new investment will have to be “qualified” and approved by the state’s economic development office.