States of Taxation

Wyoming has the best tax climate. North Carolina’s is most improved. 

Oct. 27, 2014 

On Tuesday the Tax Foundation releases its 2015 State Business Tax Climate Index and once again Wyoming leads the nation in welcoming commerce. Last year the state’s economy recorded real GDP growth of 7.6%, according to the federal Bureau of Economic Analysis.

You won’t find growth like that in New York or New Jersey, the high-tax locales that once again finished 49th and 50th among the states. New Jersey eked out real GDP growth of 1.1% last year, while New York’s economy grew an anemic 0.7%.

The annual ranking measures the impact of policies in place as of July 1 on five types of taxes on business activities, mainly considering the amount a state takes from its citizens but also the weight of its compliance burden. The five categories are individual and corporate income taxes, sales taxes, property taxes and unemployment insurance taxes.

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New Jersey loses again because the Garden State “suffers from some of the highest property tax burdens in the country, is one of just two states to levy both an inheritance and an estate tax, and maintains some of the worst structured individual income taxes in the country,” according to the report. 

Fast-growing Wyoming has no corporate or individual income tax, but it can’t rest on its laurels. Wyoming is facing new competition from states seeking to modernize their tax systems to compete for jobs and opportunities. Kansas fell three spots to 22nd despite its income-tax cuts because other states didn’t stand still.

On that score, the state showing the most improvement since last year’s ranking is North Carolina. The Tarheel State climbed to 16th this year from 44th in last year’s ranking. The Tax Foundation reports that “North Carolina’s largest improvement was in the individual income tax component section, where legislation restructured the previously multi-bracketed system” with a top rate of 7.75% to a single-bracket system with a rate of 5.8% “and a generous standard deduction of $7,500.”

North Carolina is also reducing its corporate income tax rate—to 6% this year from 6.9% last year. The rate could drop as low as 3% by 2017 if the state achieves certain revenue targets for its general fund. North Carolina also received credit in this year’s ranking for a simplified sales tax system. 

Media pundits have cast the state’s Republican U.S. Senate candidate Thom Tillis as handicapped for being Speaker in the Tarheel state House. But North Carolina’s surge in this closely watched tax ranking suggests that the state has made progress on his watch, and the economic benefits should become apparent over time in more investment, jobs and growth.

Tax climate isn’t the only determinant of state prosperity. Regulation also matters, as do human capital and natural resources like Wyoming’s oil and gas. But the latter are more likely to reach their potential in states with low tax rates.