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Grow Your Business Finances

The 10 Best (and Worst) States for Small Business Taxes

image for alfexe / Getty Images
alfexe / Getty Images

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 recently released the State Business Tax Climate Index for 2020, which ranks states according to how well their tax systems are structured. 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.

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 variables in these five major categories:

  • Corporate taxes
  • Individual income taxes
  • State taxes
  • Unemployment insurance taxes
  • Property 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 broad bases.

1. Wyoming

  • Corporate tax rank: 1 (no income tax levied)
  • Individual income tax rank: 1 (no income tax levied)
  • Sales tax rank: 6
  • Property tax rank: 39
  • Unemployment tax rank: 27

2. South Dakota

  • Corporate tax rank: 1 (no income tax levied)
  • Individual income tax rank: 1 (no income tax levied)
  • Sales tax rank: 35
  • Property tax rank: 22
  • Unemployment tax rank: 44

3. Alaska

  • Corporate tax rank: 26
  • Individual income tax rank: 1 (no income tax levied)
  • Sales tax rank: 5
  • Property tax rank: 25
  • Unemployment insurance tax rank: 46

4. Florida

  • Corporate tax rank: 9
  • Individual income tax rank: 1 (no income tax levied)
  • Sales tax rank: 23
  • Property tax rank: 13
  • Unemployment tax rank: 2

5. Montana

  • Corporate tax rank: 21
  • Individual income tax rank: 25
  • Sales tax rank: 3
  • Property tax rank: 12
  • Unemployment tax rank: 20

6. New Hampshire

  • Corporate tax rank: 43
  • Individual income tax rank: 9
  • Sales tax rank: 1
  • Property tax rank: 44
  • Unemployment tax rank: 45

7. Nevada

  • Corporate tax rank: 25
  • Individual income tax rank: 5
  • Sales tax rank: 44
  • Property tax rank: 10
  • Unemployment tax rank: 47

8. Oregon

  • Corporate tax rank: 33
  • Individual income tax rank: 38
  • Sales tax rank: 4
  • Property tax rank: 18
  • Unemployment tax rank: 36

9. Utah

  • Corporate tax rank: 12
  • Individual income tax rank: 10
  • Sales tax rank: 22
  • Property tax rank: 5
  • Unemployment tax rank: 15

10. Indiana

  • Corporate tax rank: 11
  • Individual income tax rank: 15
  • Sales tax rank: 20
  • Property tax rank: 2
  • Unemployment tax rank: 25

Logan Allec, a CPA and the founder of Money Done Right, was surprised that Texas didn't make the top 10 states for taxes.

"For one thing, Texas levies no personal income taxes, which is a boon for sole proprietors and pass-through business owners," he said. "It does have a margin tax on businesses, but your business isn't on the hook for this unless it has more than $1,130,000 in annual gross receipts for the year, meaning that many small business owners will essentially pay no state-level tax on their business income. For small, service-based businesses, Texas is great." [Read related article: How to Run a Business in Texas]

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.

1. New Jersey

  • Corporate tax rank: 49
  • Individual income tax rank: 50
  • Sales tax rank: 42
  • Property tax rank: 47
  • Unemployment tax rank: 30

2. New York

  • Corporate tax rank: 13
  • Individual income tax rank: 48
  • Sales tax rank: 43
  • Property tax rank: 46
  • Unemployment tax rank: 38

3. California

  • Corporate tax rank: 28
  • Individual income tax rank: 49
  • Sales tax rank: 45
  • Property tax rank: 16
  • Unemployment tax rank: 22

4. Connecticut

  • Corporate tax rank: 27
  • Individual income tax rank: 43
  • Sales tax rank: 26
  • Property tax rank: 50
  • Unemployment tax rank: 21

5. Arkansas

  • Corporate tax rank: 34
  • Individual income tax rank: 40
  • Sales tax rank: 46
  • Property tax rank: 29
  • Unemployment tax rank: 23

6. Minnesota

  • Corporate tax rank: 44
  • Individual income tax rank: 46
  • Sales tax rank: 28
  • Property tax rank: 26
  • Unemployment tax rank: 34

7. Vermont

  • Corporate tax rank: 45
  • Individual income tax rank: 39
  • Sales tax rank: 16
  • Property tax rank: 49
  • Unemployment tax rank: 16

8. Maryland

  • Corporate tax rank: 32
  • Individual income tax rank: 45
  • Sales tax rank: 19
  • Property tax rank: 42
  • Unemployment tax rank: 33

9. Iowa

  • Corporate tax rank: 48
  • Individual income tax rank: 42
  • Sales tax rank: 15
  • Property tax rank: 35
  • Unemployment tax rank: 35

10. Louisiana  

  • Corporate tax rank: 37
  • Individual income tax rank: 32
  • Sales tax rank: 48
  • Property tax rank: 33
  • Unemployment tax rank: 4

The states in the bottom 10 tend to have a number of afflictions in common: complex, non-neutral taxes with comparatively high rates. New Jersey, for example, is hampered by some of the highest property tax burdens in the country, the second-highest corporate income tax rate in the country and a 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.

The Climate Index is a good place to start when trying to figure out where to locate your business. In Allec's opinion, it's geared more toward small businesses taxed as sole proprietorships or S corporations than larger businesses structured as C corporations.

"For instance, I was surprised that Oregon made it in the top 10, given that it has a relatively high corporate tax rate of 6.6% on the first $10 million of corporate income and 7.6% thereafter," he said. "That said, I think the 'best states' in this list are solid from a small business perspective."

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 of remote workers, those launching a small business or startup in the U.S. have definite advantages over those launching anywhere else. From the Small Business Administration and Tax Foundation, here is a list of some of the best states to start a business in each region.

  • New Hampshire: New Hampshire is extremely business-friendly and welcoming for entrepreneurs with its abundance of government resources and lack of state sales tax. New Hampshire residents also enjoy an above-average per capita personal income, which means more discretionary spending to support new and expanding businesses.
  • North Carolina: North Carolina is home to the famous research and tech mecca known as "The Triangle," so it's no surprise that it's one of the best states to start a business. With the combined low corporate tax rates, low property taxes and low cost of living, North Carolina has a lot to offer entrepreneurs seeking a place to start their business.
  • Texas: While it didn't make the list of top 10 states with the best taxes for small businesses, it does have a large population of college-educated residents, no corporate income tax, and an ever-growing number of tech, energy and medical enterprises filing for business licenses each year.
  • Utah: Small business owners will find that Utah has low corporate taxes and the nation's highest percentage of approved small business loans. Similarly to North Carolina, Utah has a large college-educated workforce, and it encourages tech and research-related startups to take advantage of partnerships between the private sector and universities in both the digital and biomedical fields.
  • Montana: While Montana used to conjure thoughts of mountains, ranches and open plains, you should now include small businesses in that rustic image as well. With the fourth-highest rate of entrepreneurs in the country, Montana seems to know the value that businesses, both large and small, bring to the state. The cost of commercial office space is only $20 per square foot, and the fees to launch a business are some of the lowest in the country. The workforce's high percentage of college graduates and lack of a sales tax add to the state's attractive qualities for business founders.

Chad Brooks contributed to the reporting and writing in this article.

Julianna Lopez

Julianna Lopez is a freelance writer, editor, and social media marketer. She loves all things New York, books, movies and theater. If you're interested in her services, you can reach her at lopez.julianna6@gmail.com.

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