The amount of state and local taxes you pay each year can have a huge impact on your business's bottom line. They also impact the economic and employment growth of the area where your business is located. That's why it's important to know what kind of tax burden you'll face when deciding where to launch your business.
To aid small business owners and entrepreneurs in making the best decision possible, the Tax Foundation recently released the State Business Tax Climate Index for 2020, which ranks states' tax structures. This index revealed that Wyoming and South Dakota are the best states for small business taxes, while New Jersey and New York are the worst.
While ranking the states is never easy, especially since each has a different tax system, the Tax Foundation conducted its index analysis by comparing more than 100 factors across five different types of taxes:
- Corporate taxes
- Individual income taxes
- State taxes
- Unemployment insurance taxes
- Property taxes
According to the Tax Foundation's analysis, many of the top 10 states for taxes share the absence of a major tax. Wyoming, Nevada (which has gross receipts taxes) and South Dakota have no corporate or individual income tax. Alaska doesn't have individual income or sales tax at the state level, and there's no income tax in Florida. Oregon, New Hampshire and Montana have no sales tax.
This does not mean that a state cannot rank in the top 10 while still levying all of the major taxes. Indiana and Utah, for example, levy all of the major tax types, but with low rates on broad basis.
The 10 best states for small business taxes
1. Wyoming
- Corporate tax rank: 1 (no income tax levied)
- Individual income tax rank: 1 (no income tax levied)
- Sales tax rank: 6
- Property tax rank: 39
- Unemployment tax rank: 27
2. South Dakota
- Corporate tax rank: 1 (no income tax levied)
- Individual income tax rank: 1 (no income tax levied)
- Sales tax rank: 35
- Property tax rank: 22
- Unemployment tax rank: 44
3. Alaska
- Corporate tax rank: 26
- Individual income tax rank: 1 (no income tax levied)
- Sales tax rank: 5
- Property tax rank: 25
- Unemployment insurance tax rank: 46
4. Florida
- Corporate tax rank: 9
- Individual income tax rank: 1 (no income tax levied)
- Sales tax rank: 23
- Property tax rank: 13
- Unemployment tax rank: 2
5. Montana
- Corporate tax rank: 21
- Individual income tax rank: 25
- Sales tax rank: 3
- Property tax rank: 12
- Unemployment tax rank: 20
6. New Hampshire
- Corporate tax rank: 43
- Individual income tax rank: 9
- Sales tax rank: 1
- Property tax rank: 44
- Unemployment tax rank: 45
7. Nevada
- Corporate tax rank: 25
- Individual income tax rank: 5
- Sales tax rank: 44
- Property tax rank: 10
- Unemployment tax rank: 47
8. Oregon
- Corporate tax rank: 33
- Individual income tax rank: 38
- Sales tax rank: 4
- Property tax rank: 18
- Unemployment tax rank: 36
9. Utah
- Corporate tax rank: 12
- Individual income tax rank: 10
- Sales tax rank: 22
- Property tax rank: 5
- Unemployment tax rank: 15
10. Indiana
- Corporate tax rank: 11
- Individual income tax rank: 15
- Sales tax rank: 20
- Property tax rank: 2
- Unemployment tax rank: 25
On the flip side, New Jersey and California are among the worst states for small business taxes, because research shows that business owners who live there pay twice as much as they would somewhere else.
The 10 worst states for small business taxes in 2020
1. New Jersey
- Corporate tax rank: 49
- Individual income tax rank: 50
- Sales tax rank: 42
- Property tax rank: 47
- Unemployment tax rank: 30
2. New York
- Corporate tax rank: 13
- Individual income tax rank: 48
- Sales tax rank: 43
- Property tax rank: 46
- Unemployment tax rank: 38
3. California
- Corporate tax rank: 28
- Individual income tax rank: 49
- Sales tax rank: 45
- Property tax rank: 16
- Unemployment tax rank: 22
4. Connecticut
- Corporate tax rank: 27
- Individual income tax rank: 43
- Sales tax rank: 26
- Property tax rank: 50
- Unemployment tax rank: 21
5. Arkansas
- Corporate tax rank: 34
- Individual income tax rank: 40
- Sales tax rank: 46
- Property tax rank: 29
- Unemployment tax rank: 23
6. Minnesota
- Corporate tax rank: 44
- Individual income tax rank: 46
- Sales tax rank: 28
- Property tax rank: 26
- Unemployment tax rank: 34
7. Vermont
- Corporate tax rank: 45
- Individual income tax rank: 39
- Sales tax rank: 16
- Property tax rank: 49
- Unemployment tax rank: 16
8. Maryland
- Corporate tax rank: 32
- Individual income tax rank: 45
- Sales tax rank: 19
- Property tax rank: 42
- Unemployment tax rank: 33
9. Iowa
- Corporate tax rank: 48
- Individual income tax rank: 42
- Sales tax rank: 15
- Property tax rank: 35
- Unemployment tax rank: 35
10. Louisiana
- Corporate tax rank: 37
- Individual income tax rank: 32
- Sales tax rank: 48
- Property tax rank: 33
- Unemployment tax rank: 4
The states in the bottom 10 tend to have a number of afflictions in common: complex, non-neutral taxes with comparatively high rates. New Jersey, for example, is hampered by some of the highest property tax burdens in the country, the second-highest corporate income tax rate in the country, and particularly aggressive treatment of international income. The Garden State also levies an inheritance tax and maintains some of the nation's worst-structured income taxes.
The Climate Index is a good place to start when trying to figure out where to locate your business. In Allec's opinion, it's geared more toward small businesses taxed as sole proprietorships or S corporations than larger businesses structured as C corporations.
"For instance, I was surprised that Oregon made it in the top 10, given that it has a relatively high corporate tax rate of 6.6% on the first $10 million of corporate income and 7.6% thereafter," he said. "That said, I think the 'best states' in this list are solid from a small business perspective."
Choosing where to start a small business
According to the Tax Foundation's analysis, taxes can impact job creation and retention, business location, and a company's profitability. If taxes take a larger chunk of the profits, that cost is passed along to consumers, employees, shareholders or some combination of these. As you can imagine, a state with lower taxes appeals more to businesses.
While the physical location of a business may have lost some of its influence in today's world, those launching a small business or startup in the U.S. have definite advantages over those launching anywhere else. From the Small Business Administration and Tax Foundation, here is a list of some of the best states to start a business in each region.
- New Hampshire: New Hampshire is extremely business-friendly and welcoming for entrepreneurs with its abundance of government resources and lack of state sales tax. New Hampshire residents also make more money per capita. That suggests businesses might have an easier time selling their products and services.
- North Carolina: North Carolina is home to "The Triangle," a well-known tech hub, so it's no surprise that it's one of the best states to start a business. With the combined low corporate tax rates, low property taxes, and low cost of living, North Carolina has a lot to offer entrepreneurs seeking a place to start their business.
- Texas: While it didn't make the list of top 10 states with the best taxes for small businesses, it does have a large population of college-educated residents, no corporate income tax, and an ever-growing number of tech, energy, and medical enterprises filing for business licenses each year.
- Utah: Small business owners will find that Utah has low corporate taxes and the nation's highest percentage of approved small business loans. Similar to North Carolina, Utah has a large college-educated workforce.
- Montana: While Montana used to conjure thoughts of mountains, ranches, and open plains, you should now include small businesses in that image as well. With the fourth-highest rate of entrepreneurs in the country, Montana seems to know the value that businesses, both large and small, bring to the state. The workforce's high percentage of college graduates and lack of a sales tax also add to the state's attractive qualities for business founders.
Chad Brooks contributed to the reporting and writing in this article.