Washington remains at No. 17 in new Tax Foundation “State Business Tax Climate Index”

Washington has the nation’s 17th best state business tax climate, according to the Tax Foundation. That’s unchanged from a year ago. Again, in the TF calculations, Washington benefits from the absence of a personal or corporate income tax.

As the Tax Foundation writes,

The absence of a major tax is a common factor among many of the top 10 states. 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 income tax, the individual income tax, or the sales tax. Wyoming, Nevada, and South Dakota have no corporate or individual income tax (though Nevada imposes gross receipts taxes); Alaska has no individual income or state-level sales tax; Florida has no individual income tax; and New Hampshire, Montana, and Oregon have no sales tax.

This does not mean, however, that a state cannot rank in the top ten while still levying all the major taxes. Indiana and Utah, for example, levy all of the major tax types, but do so with low rates on broad bases.

Despite not having a personal income tax, Washington is dinged in the rankings for the way the Business and Occupation Tax is imposed. Here’s the somewhat wonky explanation.

As a zero rate is the lowest possible rate and the most neutral base, since it creates the most favorable tax climate for economic growth, those states with a zero rate on individual income, corporate income, or sales gain an immense competitive advantage. Therefore, states without a given tax generally receive a 10, and the Index measures all the other states against each other.

Two notable exceptions to this rule exist: the first is in Washington and Texas, which do not have taxes on wage income but do apply their gross receipts taxes to limited liability corporations (LLCs) and S corporations. Because these entities are generally taxed through the individual code, these two states do not score perfectly in the individual income tax component.

We’ll restate our caveat from last year.

As usual, we’ll provide the caution that opinions will vary regarding the weightings, measures, etc., of any index. But we’ll add that the Tax Foundation does good, objective analysis and that the information provided here will be useful to policymakers and others interested in understanding state tax systems and their effects on business.

The top 10 states are: 1) Wyoming, 2) South Dakota, 3) Alaska, 4) Florida, 5) Nevada, 6) Montana, 7) New Hampshire, 8) Utah, 9) Indiana, 10) Oregon.

To better understand Washington’s overall ranking of No. 17, it helps to look at how the state ranks on the various subindexes. 

  • Corporate tax: 46
  • Individual income tax: 6
  • Sales tax: 48
  • Unemployment insurance: 27
  • Property tax: 17

The weightings of the subindexes are:

  • 33.0% — Individual Income Tax

  •  23.3% — Sales Tax

  •  19.0% — Corporate Tax

  •  15.1% — Property Tax

  •  9.6% — Unemployment Insurance Tax

There’s a wealth of good information – fodder for policy discussions – in the report. The Tax Foundation reminds us of why tax policy matters:

The modern market is characterized by mobile capital and labor, with all types of businesses, small and large, tending to locate where they have the greatest competitive advantage. The evidence shows that states with the best tax systems will be the most competitive at attracting new businesses and most effective at generating economic and employment growth. It is true that taxes are but one factor in business decision-making. Other concerns also matter—such as access to raw materials or infrastructure or a skilled labor pool—but a simple, sensible tax system can positively impact business operations with regard to these resources. Furthermore, unlike changes to a state’s health-care, transportation, or education systems, which can take decades to implement, changes to the tax code can quickly improve a state’s business climate.

It is important to remember that even in our global economy, states’ stiffest competition often comes from other states.

Something to remember in the coming legislative session.