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A loss of population, driven by people moving out of an area, is a challenge that many communities are facing. By studying migration patterns, we can understand where people are moving to, and use those insights to form strategies for the communities. To do so, we analyze a variety of data, including one that you might not immediately think of – tax rates. If you’re from New York, this is not a surprise, most of us know people who have moved south because “taxes are too high here”. The Tax Foundation’s State Business Tax Climate Index is a great resource that can be used to compare tax systems between states and gives some insight into one factor that may impact migration decisions.
According to the Tax Foundation, this index enables business leaders, government policymakers, and taxpayers to gauge how their states’ tax systems compare. The index is designed to show how well states structure their tax systems by distilling many complex considerations to an easy-to-understand ranking. The index compares the states on over 120 variables in the five major areas of taxation (corporate taxes, individual income taxes, sales taxes, unemployment insurance taxes, and property taxes). The result is a ranking for each of the five taxation areas, as well as an overall ranking that can compared to other states. This interactive tool is an easy way to visualize the data and see how your state compares to the others, both overall and in each of the tax categories.
- Corporate Taxes: measures the impacts of states’ major taxes on business activities, both corporate income and gross receipts taxes.
- Individual Income Taxes: measures the impact of state and local taxes that fall on pass-through businesses.
- Sales Taxes: measures the impact of both sales and excise taxes, particularly when they fall upon business inputs.
- Property Taxes: measures the impacts of real and personal property, inventory, estate, inheritance, and other wealth taxes.
When using the 2020 State Business Tax Climate Index to compare tax systems across states, Wyoming, South Dakota, Alaska, Florida, and Montana rank best overall. While Wyoming and South Dakota are also the top ranked states in the corporate taxes and individual taxes categories, states that do not fall into the overall top five take the top favorable spots in the remaining three tax categories. The top ranked states in each of the five categories in 2020 are:
- Corporate Taxes: South Dakota, Wyoming
- Individual Income Taxes: South Dakota, Wyoming
- Sales Taxes: New Hampshire
- Property Taxes: New Mexico
- Unemployment Insurance Taxes: Oklahoma
At the other end of the spectrum, Arkansas, Connecticut, California, New York, and New Jersey receive the lowest overall rankings. The bottom ranked states in each of the five categories in 2020 are:
- Corporate Taxes: Delaware
- Individual Income Taxes: New Jersey
- Sales Taxes: Alabama
- Property Taxes: Connecticut
- Unemployment Insurance Taxes: Massachusetts
Why is this important?
Tax rates across each of these categories are often considerations for people and businesses choosing to move into or out of an area as small differences in tax rates and policies can have a large impact on their bank accounts and financial well-being. When a neighboring state has a more favorable tax climate, population and businesses may shift to this area. Understanding the local tax climate in relation to neighboring states is important for communities as they create long term strategies and policies.
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