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These are the best and worst states for small business taxes ranked. Where does your state fall on the list?
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 released the State Business Tax Climate Index for 2023, 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. Read ahead for the top 10 best and worst states for small business taxes, along with detailed breakdowns of each ranking.
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:
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 a broad basis.
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 states in the bottom 10 tend to have a number of afflictions in common: complex, nonneutral taxes with comparatively high rates. New Jersey, for example, is hampered by some of the highest property tax burdens in the country, a high corporate income tax rate 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.
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 United States have definite advantages over those launching anywhere else. Here is a list of some of the best states to start a business in each region:
Even though small businesses are good for local economies, some states are more friendly to them than others. States that don’t include all the major tax categories tend to be best for small businesses that want to reduce their tax liability. That said, local taxes can get complicated and addressing them isn’t a one-size-fits-all scenario. Entrepreneurs who have flexibility with where they launch their business should review the nuances of all local tax regulations before making their decision.
Julianna Lopez and Chad Brooks contributed to this article.