Which State Has the Lowest Business Tax Rate? A Comprehensive Guide

This article will provide a comprehensive guide to the lowest corporate tax rate charged by a state in the U. S. Many of the 10 states with the most taxes share the absence of a major tax. Wyoming, Nevada (which has taxes on gross income) and South Dakota have no corporate or individual income taxes.

Alaska has no income or individual sales taxes at the state level, and there are no income taxes in Florida. Oregon, New Hampshire and Montana do not have sales taxes. Indiana and Utah, for example, collect all major types of taxes, but with low rates overall. Wasylenko (199) concludes that taxes do not seem to have a substantial effect on economic activity between states, as there are few significant differences in state tax systems.

However, high taxes may be responsible for the low rates of job creation in certain states such as Minnesota, Wisconsin and New York. Once the scores are normalized, it is possible to compare the states between the indices. For example, Connecticut's 5.10 corporate income tax score is better than its 4.80 sales tax score. An income tax system creates behavioral changes when a taxpayer's income reaches the end of a tax bracket and moves to a higher bracket.

This variable is intended to measure the discouraging effect that corporate income tax has on the increase in revenues. The states that score the best on this variable are the 29 states (and the District of Columbia) that have a single-rate system. Alaska's 10-point system scores the worst in this category.Other states with high rates are Hawaii (11.0 percent), New York (10.9 percent), New Jersey (10.75 percent), Oregon (9.9 percent), Minnesota (9.85 percent), Vermont (8.75 percent) and Iowa (8.53 percent). The states with the lowest legal rates are North Dakota (2.9 percent), Arizona (2.98 percent), Pennsylvania (3.07 percent), Indiana (3.23 percent), Ohio (3.99 percent), Michigan and Louisiana (both 4.25 percent), Colorado (4.55 percent) and Utah (4.85 percent).

Alabama, Kentucky, Mississippi and New Hampshire impose a maximum legal rate of 5 percent. Illinois and Kansas, which previously had rates below 5 percent, adopted rate increases in recent years. Although Illinois's legal rate is 4.95 percent, it also imposes an additional 1.5 percent tax on transfer companies, mentioned elsewhere, bringing the rate for these entities to 6.45 percent.In some cases, states that authorize income taxes at the local level continue to keep the level of income taxes modest overall. For example, Alabama, Indiana, Michigan, and Pennsylvania allow additional income to be added to local incomes, but they are still among the states with the lowest overall rates.At the other end of the spectrum, Hawaii scores the worst with 12 groups, followed by California with 10 groups and Iowa and Missouri with 9 groups.States that do not have any type of individual income tax achieve perfect neutrality.

However, Tennessee and Texas are slightly stuck because they don't recognize LLCs or S corporations, and Nevada's payroll tax prevents the state from achieving a perfect store.New Hampshire only taxes interest and dividend income, while Washington only taxes capital gains income.Of the other 43 states, Arizona, Idaho, Illinois, Maine, Michigan, Missouri, Montana and Utah have the best scores which avoids many problems with the definition of taxable income that affect other states.Meanwhile, states where the tax base has been found to cause an unnecessary burden on economic activity include New Jersey, Delaware, New York, California, Connecticut and Ohio.At the other end of the spectrum Alabama, Washington Louisiana California and Tennessee are worst off as they impose high rates and tax a variety of commercial inputs such as public services services manufacturing and leases keeping excise taxes relatively high.Louisiana and Tennessee have the highest combined state and local rates at 9.55 percent.In general these states impose high sales tax rates that apply to a wide range of business inputs.Alabama and Louisiana have the highest average local taxes on option sales 524 and 510 respectively and in both states the average local tax on option sales is higher than the state sales tax rate.Other states with high local taxes on option sales are Colorado 487 New York 452 and Oklahoma 449.

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