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The Tax Foundation Releases 2012 State Business Tax Climate Index

Harris Kenny
January 26, 2012, 6:07pm

This morning The Tax Foundation published the 2012 State Business Tax Climate Index comparing all 50 U.S. states’ tax systems. The full report is available online in PDF format here with data available in Excel format here.

The top ten performers in this year’s Index are:

1) Wyoming

2) South Dakota

3) Nevada

4) Alaska

5) Florida

6) New Hampshire

7) Washington

8) Montana

9) Texas

10) Utah

Meanwhile, the bottom ten performers in this year’s Index are:

41) Iowa

42) Maryland

43) Wisconsin

44) North Carolina

45) Minnesota

46) Rhode Island

47) Vermont

48) California

49) New York

50) New Jersey

Overall, the Index notes 2011 was a relatively light year in state tax changes so there weren’t many major changes from the previous edition of this report. Some insight can be gleaned from several states that shines light on what to expect in 2012. The states of interest include: Illinois, which raised taxes that have gone into effect; Connecticut, which raised taxes that are going into effect; Colorado, which had a tax increase ballot initiative defeated by voters; and finally New Jersey, which is exploring cutting taxes.

Illinois had the greatest drop over the past year plunging twelve places from 16th place down to 28th place. Here’s how Illinois stacks up:

The Prairie State’s drop can be attributed to lawmakers’ decision to raise individual income tax rates from 3 percent up to 5 percent, and the corporate tax rates from 7.3 percent up to 9.5 percent. The individual income tax rate constitutes an approximately 67% increase and the corporate tax rate constitutes an approximately 46% increase. The Illinois Policy Institute (IPI) dismantles this approach and declares bluntly, “The verdict is in: The tax hike failed.” Specifically, IPI finds:

1) Spending grew, bills went unpaid and pension reform stalled;

2) Illinois’ unemployment problem worsened; and

3) The tax hike made Illinois less competitive and forced business to leave the state.

For more, read IPI’s full Tax & Budget Brief available online here

Connecticut lawmakers took similar action implementing what the Hartford Courant describes as, “one of the largest and most wide-ranging tax increase proposals in Connecticut history.” Here’s how Connecticut stacks up in the Index:

That being said, Gov. Dan Malloy is exploring several laudable reforms that I describe here. Proposed reform measures weren’t enough to stop Moody’s Investors Service from downgrading Connecticut’s general obligation bond rating from Aa3 to Aa2 affecting nearly $15 billion in outstanding general obligation bonds. The Bond Buyer reports, “Moody’s cited Connecticut’s high combined fixed costs for debt service and post employment benefits relative to the state’s budget; pension funded ratios that are among the lowest in the country and likely to remain well below average; and depleted reserves with slim prospects for near-term replenishment.”

In Colorado, also known as the land of TABOR (Taxpayers’ Bill of Rights), voters had the opportunity to vote on a far reaching, estimated $3 billion tax increase through Proposition 103. Since the Index was calculated at the beginning of the fiscal year (July 2011), here’s where Colorado ranked prior to the November election:

Prop. 103 would have raised personal and corporate income tax rates from 4.63 percent up to 5 percent, and the sales and use tax rate from 2.9 percent up to 3 percent. Gov. John Hickenlooper did not take a position on Prop. 103, but in footage recorded by Kelly Maher of the vlog WhoSaidYouSaid he said, “there’s no appetite for taxes anywhere, all over the state.” Gov. Hickenlooper was right – 63.5 percent of Coloradans voted against Prop. 103. After spurning Prop. 103, Coloradans will likely retain their competitive ranking in the Index moving forward. Colorado is a politically significant swing state and its voters sent a clear message in 2011 that other states ignore at their own peril in 2012. 

For more on the impact Prop. 103 might have had, see the Independence Institute’s Proposition 103: What Is The Cost to Colorado Taxpayers?, available online here

Then there’s the outlier: New Jersey. The Garden State ranks last in the Index with the following figures:

These numbers are bleak. But rather than double down on a high tax approach like Illinois, New Jersey is charting a new course under Gov. Chris Christie. Just last week, Gov. Christie proposed an across the board ten percent tax cut and a full restoration of the earned income tax credit. Christie explained the move to reporters by alluding to the Index saying, “When that income tax cut comes in, I’m willing to bet you that we won’t be 50th again next time.”  

Taxes aren’t the only problem states are facing. For example, Sunshine Review recently identified California and Illinois for having: the first and second highest paid public sector employees of the governments surveyed; and the first and second highest number of public sector employees receiving over $150,000 in annual compensation. For more on this see my previous post here.

Tax policy is not the be-all end-all concern, but it does separate the wheat from the chaff by demonstrating which states are able to balance their books and run fiscally sustainable governments, and which states have to keep going back to taxpayers to replenish their coffers.


Harris Kenny is Policy Analyst


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