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What States Have the Best Tax Rates for Small Businesses?

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As we all become more mobile, so do our small businesses. More business owners than ever are shopping around for a better state to conduct their commerce.

While there is a lot of coverage in the news about the global economy, often the more important competition is between states for local businesses.

And, not surprisingly, tax rates are a prime concern for itchy small business owners looking around for a new spot to locate. The Tax Foundation, in compiling their most recent State Business Tax Climate Index, highlight that variable.

"State lawmakers are right to be concerned about how their states rank in the global competition for jobs and capital, but they need to be more concerned with companies moving from Detroit, Mich., to Dayton, Ohio, rather than from Detroit to New Delhi," writes the report's co-authors, Scott Drenkard, an economist at the foundation, and Joseph Henchman, vice president for state projects at the foundation. "This means that state lawmakers must be aware of how their states' business climates match up to their immediate neighbors and to other states within their regions."

According to the report, the 10 best business tax climates can be found in:

  • Wyoming
  • South Dakota
  • Nevada
  • Alaska
  • Florida
  • Washington
  • Montana
  • New Hampshire
  • Utah
  • Indiana

The absence of a major tax is the prime contributing factor in moving these states to the top of the list. For example, Wyoming, Nevada and South Dakota have no corporate or individual income tax. Florida has no individual income tax and New Hampshire and Montana have no sales tax.

The worst tax climate states for small business, according to the report, are:

  • New York
  • California
  • Minnnesota
  • Wisconsin
  • North Carolina
  • Maryland
  • Rhode Island
  • Connecticut
  • New Jersey
  • Vermont

The states in the bottom 10 tend to have a full array of taxes with comparatively high rates.

The pattern is clear in the listings: Mountain West states tend to have lower taxes and thus are more friendly to business, while Northeast and Rust Belt states tend to levy the most taxes and thus are hostile to business creation and retention.

As our society continues to be more mobile and quick-paced, states need to keep their tax structures in mind when they try to attract or retain the small business clientele they need to thrive.