There are a lot of factors to consider when you begin to establish your business and one factor that is often overlooked is the effect state taxes will have on your business’s bottom line. Sometimes businesses forget that in addition to those federal taxes, they also have to pay state taxes and often local city business taxes as well. All of that can make a big dent on a business’s bottom line.
The Tax Foundation, a non-profit that specializes in tax policy took a look at all 50 states and ranked them in five different categories: corporate tax, individual income tax, sales tax, property tax, and unemployment insurance tax. Based on those rankings, it came up for an overall ranking for each state. You can see the full list here, but to make it a little easier, take a look at the top and bottom three on the list.
The Top 3
The state of Wyoming has the lowest corporate and individual income taxes in the United States. Its sales tax (just 4% in 2019) is also in the top 10, which makes it a very agreeable place for businesses to set up shop.
Alaska is top in America when it comes to individual income tax and 25th for corporate tax. The state has no sales tax, but it allows cities to tax purchases up to 7%, which dropped the state down a few pegs in the rankings.
There are downsides to opening a business in Alaska. The cost of living in Alaska is high and the quality of life can be poor considering for part of the year it’s pretty dark outside.
South Dakota has the best corporate tax rate in the country and is tied with Wyoming for the best individual tax rate. But the state’s sales tax rate is 4.5% which is what knocked South Dakota down to third on the list.
New York’s low ranking has a lot to do with property taxes and the individual state income tax, which are 47th and 48th respectively. The one place the state does excel is how it treats its corporations. According to Nolo, the default corporate tax rate is 6.5%, but emerging technology companies get a 1% break and qualified manufacturers pay no corporate tax at all.
New York includes New York City and that’s another roadblock for businesses. Companies that want to open up in The Big Apple will have to contend with another set of taxes as well. According to Smart Asset, New York City also collects its own individual income tax on top of what the state and federal government collect.
Second to last on the list is California, in large part because of how much it charges in corporate and individual taxes. California is 49th on the list in individual tax, behind only New Jersey, which just so happens to be the lowest ranking state on the Tax Foundation’s list.
There is an upside to California, U.S. News ranks the Golden State as the top spot to start a business because “The state boasts the most venture capital investment and the highest patent creation rate of any state.”
The Garden State falls to the bottom of the list because it has high taxes in almost every category. The state has the highest individual tax in the United States and ranks 47th in corporate tax. There’s also a state sales tax that ranks 45th on the list at 6.625%.