Best to Worst State Tax Systems for Entrepreneurship and Small Business
Taxes are an endless problem that plagues entrepreneurs and small businesses. But April often is
the time when the nation takes particular note of tax burdens. After all, April 15 is “Tax Day” –
the deadline for filing income taxes.
Income taxes certainly warrant the most attention. At the federal level, income-based taxes – the
personal income, corporate income, and payroll levies – exact an enormous amount of resources
out of the private sector, in order to be spent by politicians and their appointees.
But the tax problems for entrepreneurs and small businesses do not stop at the federal level, and
do not end with the income tax. State and localities pile on with their own tax systems. And
taxes in the states come in many different forms, including income, property, sales, assorted
excise, gross receipts, and death levies, along with a wide array of governmental fees. Indeed, the
list of taxes to be paid is quite long.
Each and every tax, of course, eats away at the bottom line of a business. At the same time,
though, different taxes affect economic decision-making in different ways. For example, income
taxes impact incentives for working, investing and risk taking. Property taxes affect decisions
regarding investments in buildings and housing. And consumption-based taxes can divert and
reduce consumer purchases.
In the end, taxes matter. They matter at the federal, state and local levels of government. They
matter to consumers, entrepreneurs, investors and businesses. They matter in terms of a state’s
competitiveness. And they matter when it comes to economic growth and job creation.
The Small Business & “Business Tax Index 2008” ranks the states
from best to worst in terms of the costs of their tax systems on entrepreneurship and small
business. The Index pulls together 16 different tax measures, and combines those into one tax
score that allows the 50 states and District of Columbia to be compared and ranked.
The 16 measures are: 1) state’s top personal income tax rate, 2) state’s top individual capital
gains tax rate, 3) state’s top corporate income tax rate, 4) state’s top corporate capital gains tax
rate, 5) any added income tax on S-Corporations, 6) whether or not the state imposes an
alternative minimum tax on individuals, 7) whether or not the state imposes an alternative
minimum tax on corporations, 
whether or not the state’s personal income tax brackets are
indexed for inflation, 9) property taxes, 10) consumption-based taxes (i.e., sales, gross receipts
and excise taxes), 11) whether or not the state imposes a death tax, 12) unemployment tax, 13)
whether or not the state has a tax limitation mechanism, 14) whether or not the state imposes an
Internet access tax, 15) gas tax, and 16) diesel tax.
The 15 best state tax systems are: 1) South Dakota, 2) Nevada, 3) Wyoming, 4) Washington, 5)
Florida, 6) Alaska, 7) Texas, Colorado, 9) Alabama, 10) Mississippi, 11) South Carolina, 12)
Tennessee, 13) Missouri, 14) Ohio, and 15) Virginia.
The 15 worst state tax systems are: 37) North Carolina, 38) Nebraska, 39) West Virginia, 40)
Hawaii, 41) Idaho, 42) Vermont, 43) Massachusetts, 44) New York, 45) Rhode Island, 46)
Maine, 47) Iowa, 48) California, 49) Minnesota, 50) New Jersey, and 51) District of Columbia.
Following are the “Business Tax Index” scores and rankings, followed by brief descriptions of
why each factor is included in the Index, and how it is measured.
The 15 worst state tax systems are: 37) North Carolina, 38) Nebraska, 39) West Virginia, 40)
Hawaii, 41) Idaho, 42) Vermont, 43) Massachusetts, 44) New York, 45) Rhode Island, 46)
Maine, 47) Iowa, 48) California, 49) Minnesota, 50) New Jersey, and 51) District of Columbia.
Following are the “Business Tax Index” scores and rankings, followed by brief descriptions of
why each factor is included in the Index, and how it is measured.
