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Most tax friendly investments for 2021 orlando investment companies

Most tax friendly investments for 2021

Explore Our Interactive Map Tool. While there are many ways to show how much is collected in taxes by state governments, the Index is designed to show how well states structure their tax systems and provides a road map for improvement. The absence of a major tax is a common factor among many of the top 10 states. Property taxes and unemployment insurance taxes are levied in every state, but there are several states that do without one or more of the major taxes: the corporate income tax, the individual income tax, or the sales tax.

Nevada, South Dakota, and Wyoming have no corporate or individual income tax though Nevada imposes gross receipts tax es ; Alaska has no individual income or state-level sales tax ; Florida has no individual income tax ; and New Hampshire and Montana have no sales tax. This does not mean, however, that a state cannot rank in the top 10 while still levying all the major taxes.

Indiana, North Carolina, and Utah, for example, levy all of the major tax types, but do so with low rates on broad bases. The states in the bottom 10 tend to have a number of afflictions in common: complex, nonneutral taxes with comparatively high rates.

District of Columbia. Note: A rank of 1 is best, 50 is worst. Rankings do not average to the total. States without a tax rank equally as 1. The report shows tax systems as of July 1, the beginning of Fiscal Year This temporary reduction is the result of revenue triggers adopted in , and enhanced revenue from corporate base broadening—the result of the federal Tax Cuts and Jobs Act TCJA —quickly met the 7 percent excess collections threshold required for a rate reduction.

In , Missouri adopted individual and corporate income tax reforms, set to phase in over time. Last year saw a significant reduction in the top rate of the individual income tax, from 5. No additional rate cut has been triggered thus far. The corporate income tax reform package did, however, go into effect in The state no longer gives companies the option of choosing the apportionment formula most favorable to them, but this consolidation into a single apportionment formula paid down a significant corporate income tax rate reduction, from 6.

Two years ago, New Jersey lawmakers adopted a temporary corporate surtax, imposing an additional 2. The state remains 50th on the Index overall. Oregon, which straddles the difference between the two rates, is now one of only two states, with Delaware, to impose both a corporate income tax and a gross receipts tax.

All scores are for fiscal years. The State Business Tax Climate Index distills many complex considerations to an easy-to-understand ranking. The modern market is characterized by mobile capital and labor, with all types of businesses, small and large, tending to locate where they have the greatest competitive advantage. The evidence shows that states with the best tax systems will be the most competitive at attracting new businesses and most effective at generating economic and employment growth.

It is true that taxes are but one factor in business decision-making. Other concerns also matter—such as access to raw materials or infrastructure or a skilled labor pool—but a simple, sensible tax system can positively impact business operations with regard to these resources.

The Department of Labor reports that most mass job relocations are from one U. Anecdotes about the impact of state tax systems on business investment are plentiful. In Illinois early last decade, hundreds of millions of dollars of capital investments were delayed when then-Governor Rod Blagojevich D proposed a hefty gross receipts tax.

In , California-based Intel decided to build a multibillion-dollar chip-making facility in Arizona due to its favorable corporate income tax system. Tax competition is an unpleasant reality for state revenue and budget officials, but it is an effective restraint on state and local taxes. When a state imposes higher taxes than a neighboring state, businesses will cross the border to some extent. Therefore, states with more competitive tax systems score well in the Index , because they are best suited to generate economic growth.

This can be a dangerous proposition, as the example of Dell Computers and North Carolina illustrates. Many of the incentives came in the form of tax credits from the state and local governments. Unfortunately, Dell announced in that it would be closing the plant after only four years of operations. Lawmakers make these deals under the banner of job creation and economic development, but the truth is that if a state needs to offer such packages, it is most likely covering for an undesirable business tax climate.

When assessing which changes to make, lawmakers need to remember two rules:. To some extent, tax-induced economic distortions are a fact of life, but policymakers should strive to maximize the occasions when businesses and individuals are guided by business principles and minimize those cases where economic decisions are influenced, micromanaged, or even dictated by a tax system.

The more riddled a tax system is with politically motivated preferences, the less likely it is that business decisions will be made in response to market forces. The Index rewards those states that minimize tax-induced economic distortions. Ranking the competitiveness of 50 very different tax systems presents many challenges, especially when a state dispenses with a major tax entirely.

The Index deals with such questions by comparing the states on more than variables in the five major areas of taxation corporate taxes, individual income taxes, sales taxes, unemployment insurance taxes, and property taxes and then adding the results to yield a final, overall ranking. This approach rewards states on particularly strong aspects of their tax systems or penalizes them on particularly weak aspects , while measuring the general competitiveness of their overall tax systems.

Ultimately, both Alaska and Indiana score well. Economists have not always agreed on how individuals and businesses react to taxes. Tiebout suggested that citizens with high demands for public goods would concentrate in communities with high levels of public services and high taxes while those with low demands would choose communities with low levels of public services and low taxes.

Competition among jurisdictions results in a variety of communities, each with residents who all value public services similarly. However, businesses sort out the costs and benefits of taxes differently from individuals. For businesses, which can be more mobile and must earn profits to justify their existence, taxes reduce profitability. Theoretically, businesses could be expected to be more responsive than individuals to the lure of low-tax jurisdictions.

Shleifer first proposed comparing regulated franchises in order to determine efficiency. Tax changes that are out of sync with neighboring jurisdictions will impact voting behavior. The economic literature over the past 50 years has slowly cohered around this hypothesis.

Ladd summarizes the post-World War II empirical tax research literature in an excellent survey article, breaking it down into three distinct periods of differing ideas about taxation: 1 taxes do not change behavior; 2 taxes may or may not change business behavior depending on the circumstances; and 3 taxes definitely change behavior.

Period one, with the exception of Tiebout, included the s, s, and s and is summarized succinctly in three survey articles: Due , Oakland , and Wasylenko He found no evidence to support the notion that taxes influence business location. Oakland was skeptical of the assertion that tax differentials at the local level had no influence at all.

However, because econometric analysis was relatively unsophisticated at the time, he found no significant articles to support his intuition. However, the statistical significance was lower than that of other factors such as labor supply and agglomeration economies. Therefore, he dismissed taxes as a secondary factor at most.

Period two was a brief transition during the early- to mids. This was a time of great ferment in tax policy as Congress passed major tax bills, including the so-called Reagan tax cut in and a dramatic reform of the federal tax code in Articles revealing the economic significance of tax policy proliferated and became more sophisticated.

Articles that fit into period three begin to surface as early as , as Helms and Bartik put forth forceful arguments based on empirical research that taxes guide business decisions. Furthermore, tax increases significantly retard economic growth when the revenue is used to fund transfer payments. Bartik concluded that the conventional view that state and local taxes have little effect on business is false.

Papke and Papke found that tax differentials among locations may be an important business location factor, concluding that consistently high business taxes can represent a hindrance to the location of industry. Interestingly, they use the same type of after-tax model used by Tannenwald , who reaches a different conclusion.

Bartik provides strong evidence that taxes have a negative impact on business start-ups. He finds specifically that property taxes, because they are paid regardless of profit, have the strongest negative effect on business. By the early s, the literature had expanded sufficiently for Bartik to identify 57 studies on which to base his literature survey.

The large number of studies permitted Bartik to take a different approach from the other authors. Instead of dwelling on the results and limitations of each individual study, he looked at them in the aggregate and in groups. Although he acknowledged potential criticisms of individual studies, he convincingly argued that some systematic flaw would have to cut across all studies for the consensus results to be invalid.

In striking contrast to previous reviewers, he concluded that taxes have quite large and significant effects on business activity. Agostini and Tulayasathien examined the effects of corporate income taxes on the location of foreign direct investment in U.

Mark, McGuire, and Papke found that taxes are a statistically significant factor in private-sector job growth. Specifically, they found that personal property taxes and sales taxes have economically large negative effects on the annual growth of private employment. Harden and Hoyt point to Phillips and Gross as another study contending that taxes impact state economic growth, and they assert that the consensus among recent literature is that state and local taxes negatively affect employment levels.

Harden and Hoyt conclude that the corporate income tax has the most significant negative impact on the rate of growth in employment. Gupta and Hofmann regressed capital expenditures against a variety of factors, including weights of apportionment formulas, the number of tax incentives, and burden figures. Their model covered 14 years of data and determined that firms tend to locate property in states where they are subject to lower income tax burdens.

Furthermore, Gupta and Hofmann suggest that throwback requirements are the most influential on the location of capital investment, followed by apportionment weights and tax rates, and that investment-related incentives have the least impact. Other economists have found that taxes on specific products can produce behavioral results similar to those that were found in these general studies.

For example, Fleenor looked at the effect of excise tax differentials between states on cross-border shopping and the smuggling of cigarettes. Moody and Warcholik examined the cross-border effects of beer excises. Their results, supported by the literature in both cases, showed significant cross-border shopping and smuggling between low-tax states and high-tax states.

Fleenor found that shopping areas sprouted in counties of low-tax states that shared a border with a high-tax state, and that approximately Similarly, Moody and Warcholik found that in , Although the literature has largely congealed around a general consensus that taxes are a substantial factor in the decision-making process for businesses, disputes remain, and some scholars are unconvinced.

Based on a substantial review of the literature on business climates and taxes, Wasylenko concludes that taxes do not appear to have a substantial effect on economic activity among states. However, his conclusion is premised on there being few significant differences in state tax systems.

According to Wasylenko, other legislative actions are likely to accomplish more positive economic results because in reality, taxes do not drive economic growth. However, there is ample evidence that states compete for businesses using their tax systems. A recent example comes from Illinois, where in early lawmakers passed two major tax increases. The individual income tax rate increased from 3 percent to 5 percent, and the corporate income tax rate rose from 7.

A new literature review, Kleven et al. Meanwhile, Giroud and Rauh use microdata on multistate firms to estimate the impact of state taxes on business activity, and find that C corporation employment and establishments have short-run corporate tax elasticities of Some recent contributions to the literature on state taxation criticize business and tax climate studies in general.

However, a careful examination of these criticisms reveals that the authors believe taxes are unimportant to businesses and therefore dismiss the studies as merely being designed to advocate low taxes.

In the second edition, he identified three overarching questions: 1 whether the indices included relevant variables, and only relevant variables; 2 whether these variables measured what they purport to measure; and 3 how the index combines these measures into a single index number Fisher The Index does not purport to measure economic opportunity or freedom, or even the broad business climate, but rather the narrower business tax climate, and its variables reflect this focus.

It is by no means clear what the best course of action is for state lawmakers who want to thwart crime, for example, either in the short or long term, but they can change their tax codes now. Bittlingmayer et al. They also observed that studies focused on a single topic do better at explaining economic growth at borders. Lastly, the article concludes that the most important elements of the business climate are tax and regulatory burdens on business Bittlingmayer et al. These findings support the argument that taxes impact business decisions and economic growth, and they support the validity of the Index.

Fisher and Bittlingmayer et al. Fisher finds support from Robert Tannenwald, formerly of the Boston Federal Reserve, who argues that taxes are not as important to businesses as public expenditures. Tannenwald compares 22 states by measuring the after-tax rate of return to cash flow of a new facility built by a representative firm in each state. This very different approach attempts to compute the marginal effective tax rate of a hypothetical firm and yields results that make taxes appear trivial.

The taxes paid by businesses should be a concern to everyone because they are ultimately borne by individuals through lower wages, increased prices, and decreased shareholder value. States do not institute tax policy in a vacuum. Each component is devoted to a major area of state taxation and includes numerous variables. Overall, there are variables measured in this report. The five components are not weighted equally, as they are in some indices. The standard deviation of each component is calculated and a weight for each component is created from that measure.

The result is a heavier weighting of those components with greater variability. The weighting of each of the five major components is:. This improves the explanatory power of the State Business Tax Climate Index as a whole, because components with higher standard deviations are those areas of tax law where some states have significant competitive advantages.

Businesses that are comparing states for new or expanded locations must give greater emphasis to tax climates when the differences are large. On the other hand, components in which the 50 state scores are clustered together, closely distributed around the mean, are those areas of tax law where businesses are more likely to de-emphasize tax factors in their location decisions.

For example, Delaware is known to have a significant advantage in sales tax competition, because its tax rate of zero attracts businesses and shoppers from all over the Mid-Atlantic region. That advantage and its drawing power increase every time another state raises its sales tax. Within each component are two equally weighted subindices devoted to measuring the impact of the tax rates and the tax base s.

Each subindex is composed of one or more variables. There are two types of variables: scalar variables and dummy variables. A scalar variable is one that can have any value between 0 and If a subindex is composed only of scalar variables, then they are weighted equally. A dummy variable is one that has only a value of 0 or 1. For example, a state either indexes its brackets for inflation or does not.

Mixing scalar and dummy variables within a subindex is problematic, because the extreme valuation of a dummy can overly influence the results of the subindex. To counter this effect, the Index generally weights scalar variables 80 percent and dummy variables 20 percent. The State Business Tax Climate Index is designed as a relative index rather than an absolute or ideal index.

Comparing States without a Tax. One problem associated with a relative scale is that it is mathematically impossible to compare states with a given tax to states that do not have the tax. As a zero rate is the lowest possible rate and the most neutral base, since it creates the most favorable tax climate for economic growth, those states with a zero rate on individual income, corporate income, or sales gain an immense competitive advantage.

Therefore, states without a given tax generally receive a 10, and the Index measures all the other states against each other. Three notable exceptions to this rule exist. The first is in Washington and Texas, which do not have taxes on wage income but do apply their gross receipts taxes to limited liability corporations LLCs and S corporation s. Because these entities are generally taxed through the individual code, these two states do not score perfectly in the individual income tax component.

The second exception is found in Nevada, where a payroll tax for purposes other than unemployment insurance is also included in the individual income tax component. Nevada likewise imposes a gross recepts gax, calld the Commerce Tax. The final exception is in zero sales tax states—Alaska, Montana, New Hampshire, Oregon, and Washington—which do not have general sales taxes but still do not score a perfect 10 in that component section because of excise taxes on gasoline, beer, spirits, and cigarettes, which are included in that section.

Alaska, moreover, forgoes a state sales tax, but does permit local option sales taxes. Normalizing Final Scores. Another problem with using a relative scale within the components is that the average scores across the five components vary. This alters the value of not having a given tax across major indices. For example, the unadjusted average score of the corporate income tax component is 6.

Once the scores are normalized, it is possible to compare states across indices. Therefore, this edition is the Index and represents the tax climate of each state as of July 1, , the first day of fiscal year for most states.

The District of Columbia D. The edition of the Index introduces new variables to the property tax base subindex, accounting for split roll property taxation and property tax limitations. States vary considerably in their treatment of different classes of property—residential, agricultural, commercial, industrial, etc. Sometimes, local governments are permitted to establish different rates on different classes of property.

Commercial property might, for instance, have an assessment ratio of 50 percent, while residential property faces a 25 percent assessment ratio—meaning that, with the same rate applied to both, commercial properties face twice the effective rate of residential properties. The Index now includes a dummy variable on the existence of a split roll, as well as a variable measuring the ratio between commercial and residential effective rates. The Index now takes property tax limitation regimes into account as well.

In broad terms, they take on a tripartite typology: assessment, rate, and levy limits. They often, but not always, reset upon sale or change of use, and sometimes reset when substantial improvements are made. Rate limits either cap the allowable rate or restrict the amount by which the rate can be raised in a given year. Levy limits impose a restriction on the growth of total collections excluding those from new construction , implementing or necessitating rate reductions if revenues exceed the allowable growth rate.

Most limitation regimes permit voter overrides. Assessment limits distort property taxation, leading to similar properties facing highly disparate effective rates of taxation and influencing decisions about property utilization. Rate and levy limits, by contrast, maintain tax neutrality while restricting—with varying degrees of rigidity—the growth of property tax burdens. The Index now includes two dummy variables, one penalizing states for imposing assessment limitations and the other rewarding states for adopting either a rate or levy limit, or both.

This report includes Index rankings that can be used for comparison with the rankings and scores. These can differ from previously published Index rankings and scores due to enactment of retroactive statutes, backcasting of the above methodological changes, and corrections to variables brought to our attention since the last report was published. The scores and rankings in this report are definitive. For example, Newman found that differentials in state corporate income taxes were a major factor influencing the movement of industry to Southern states.

Most states levy standard corporate income taxes on profit gross receipts minus expenses. Some states, however, problematically impose taxes on the gross receipts of businesses with few or no deductions for expenses.

Texas also added the Margin Tax, a complicated gross receipts tax, in , Nevada adopted the gross receipts-based multi-rate Commerce Tax in , and Oregon implemented a new modified gross receipts tax this year. Several states contemplated gross receipts taxes in , but none were adopted.

Since gross receipts taxes and corporate income taxes are levied on different bases, we separately compare gross receipts taxes to each other, and corporate income taxes to each other, in the Index. For states with corporate income taxes, the corporate tax rate subindex is calculated by assessing three key areas: the top tax rate, the level of taxable income at which the top rate kicks in, and the number of brackets.

States that levy neither a corporate income tax nor a gross receipts tax achieve a perfectly neutral system in regard to business income and thus receive a perfect score. States that do impose a corporate tax generally will score well if they have a low rate. States with a high rate or a complex and multiple-rate system score poorly. States that score well on the corporate tax base subindex generally will have few business tax credit s, generous carryback and carryforward provisions, deductions for net operating losses, conformity to the Internal Revenue Code, and provisions that alleviate double taxation.

Two states levy neither a corporate income tax nor a gross receipts tax: South Dakota and Wyoming. These states automatically score a perfect 10 on this subindex. Therefore, this section ranks the remaining 48 states relative to each other. Top Tax Rate. Other states with comparatively high corporate income tax rates are Pennsylvania 9.

Other states with comparatively low top corporate tax rates are Colorado 4. Graduated Rate Structure. Two variables are used to assess the economic drag created by multiple-rate corporate income tax systems: the income level at which the highest tax rate starts to apply and the number of tax bracket s. Twenty-nine states and the District of Columbia have single-rate systems, and they score best. Single-rate systems are consistent with the sound tax principles of simplicity and neutrality.

Indeed, low-income corporations may be owned by individuals with high incomes, and high-income corporations may be owned by individuals with low incomes. A single-rate system minimizes the incentive for firms to engage in expensive, counterproductive tax planning to mitigate the damage of higher marginal tax rate s that some states levy as taxable income rises. The Top Bracket. The highest score is awarded to a single-rate system that has one bracket that applies to the first dollar of taxable income.

Next best is a two-bracket system where the top rate kicks in at a low level of income, since the lower the top rate kicks in, the more the system is like a flat tax. States with multiple brackets spread over a broad income spectrum are given the worst score. Number of Brackets. At such a break point, incentives change, and as a result, numerous rate changes are more economically harmful than a single-rate structure. This variable is intended to measure the disincentive effect the corporate income tax has on rising incomes.

States that score the best on this variable are the 30 states—and the District of Columbia—that have a single-rate system. Other states with multi-bracket systems include Arkansas six brackets and Louisiana five brackets. Under a gross receipts tax, some of these tax base criteria net operating losses and some corporate income tax base variables are replaced by the availability of deductions from gross receipts for employee compensation costs and cost of goods sold.

States are rewarded for granting these deductions because they diminish the greatest disadvantage of using gross receipts as the base for corporate taxation: the uneven effective tax rates that various industries pay, depending on how many levels of production are hit by the tax. Net Operating Losses. The corporate income tax is designed to tax only the profits of a corporation. For example, a corporation in a highly cyclical industry may look very profitable during boom years but lose substantial amounts during bust years.

When examined over the entire business cycle, the corporation may actually have an average profit margin. The deduction for net operating losses NOL helps ensure that, over time, the corporate income tax is a tax on average profitability. Without the NOL deduction, corporations in cyclical industries pay much higher taxes than those in stable industries, even assuming identical average profits over time.

Simply put, the NOL deduction helps level the playing field among cyclical and noncyclical industries. Under the Tax Cuts and Jobs Act, the federal government allows losses to be carried forward indefinitely, though they may only reduce taxable income by 80 percent in any given year. Because gross receipts taxes inherently preclude the possibility of carrying net operating losses backward or forward, the Index treats states with statewide gross receipts taxes as having the equivalent of no NOL carryback or carryforward provisions.

Number of Years Allowed for Carryback and Carryforward. This variable measures the number of years allowed on a carryback or carryforward of an NOL deduction. Generally, states entered FY with better treatment of the carryforward up to a maximum of 20 years than the carryback up to a maximum of three years. States score well on the Index if they conform to the new federal provisions or provide their own robust system of carryforwards and carrybacks.

Caps on the Amount of Carryback and Carryforward. States that limit those amounts are ranked lower in the Index. Two states, Idaho and Montana, limit the amount of carrybacks, though they do better than many of their peers in offering any carryback provisions at all. Of states that allow a carryforward of losses, only New Hampshire and Pennsylvania limit carryforwards.

As a result, these states score poorly on this variable. Gross Receipts Tax Deduction s. Proponents of gross receipts taxation invariably praise the steadier flow of tax receipts into government coffers in comparison with the fluctuating revenue generated by corporate income taxes, but this stability comes at a great cost. The attractively low statutory rates associated with gross receipts taxes are an illusion.

Since gross receipts taxes are levied many times in the production process, the effective tax rate on a product is much higher than the statutory rate would suggest. Effective tax rates under a gross receipts tax vary dramatically by industry or individual business, a stark departure from the principle of tax neutrality. Firms with few steps in their production chain are relatively lightly taxed under a gross receipts tax, and vertically-integrated, high-margin firms prosper, while firms with longer production chains are exposed to a substantially higher tax burden.

The pressure of this economic imbalance often leads lawmakers to enact separate rates for each industry, an inevitably unfair and inefficient process. Two reforms that states can make to mitigate this damage are to permit deductions from gross receipts for employee compensation costs and cost of goods sold, effectively moving toward a regular corporate income tax.

Delaware, Nevada, Ohio, Oregon, and Washington score the worst, because their gross receipts taxes do not offer full deductions for either the cost of goods sold or employee compensation. Texas offers a deduction for either the cost of goods sold or employee compensation but not both.

States that use federal definitions of income reduce the tax compliance burden on their taxpayers. Two states Arkansas and Mississippi do not conform to federal definitions of corporate income and they score poorly. The vast array of federal depreciation schedules is, by itself, a tax complexity nightmare for businesses. The specter of having 50 different schedules would be a disaster from a tax complexity standpoint.

One state California adds complexity by failing to fully conform to the federal system. Deductibility of Depletion. The deduction for depletion works similarly to depreciation, but it applies to natural resources. As with depreciation, tax complexity would be staggering if all 50 states imposed their own depletion schedules. This variable measures the degree to which states have adopted the federal depletion schedules. Alternative Minimum Tax.

The federal Alternative Minimum Tax AMT was created to ensure that all taxpayers paid some minimum level of taxes every year. Unfortunately, it does so by creating a parallel tax system to the standard corporate income tax code. Evidence shows that the AMT does not increase efficiency or improve fairness in any meaningful way.

It nets little money for the government, imposes compliance costs that in some years are actually larger than collections, and encourages firms to cut back or shift their investments Chorvat and Knoll, As such, states that have mimicked the federal AMT put themselves at a competitive disadvantage through needless tax complexity. Deductibility of Taxes Paid. This variable measures the extent of double taxation on income used to pay foreign taxes, i.

States can avoid this double taxation by allowing the deduction of taxes paid to foreign jurisdictions. Twenty-three states allow deductions for foreign taxes paid and score well. The remaining states with corporate income taxation do not allow deductions for foreign taxes paid and thus score poorly. Indexation of the Tax Code. For states that have multiple-bracket corporate income taxes, it is important to index the brackets for inflation. That prevents de facto tax increases on the nominal increase in income due to inflation.

Among the 50 states, there is little harmony in apportionment formulas. Many states weight the three factors equally while others weight the sales factor more heavily a recent trend in state tax policy. To counter this phenomenon, many states have adopted what are called throwback rules because they identify nowhere income and throw it back into a state where it will be taxed, even though it was not earned in that state. Throwback and throwout rules for sales of tangible property add yet another layer of tax complexity.

States with corporate income taxation are almost evenly divided between those with and without throwback rules. Twenty states do not have them, while 25 states and the District of Columbia do. Section k Expensing.

Because corporate income taxes are intended to fall on net income, they should include deductions for business expenses—including investment in machinery and equipment. Historically, however, businesses have been required to depreciate the value of these purchases over time. Net Interest Limitation. Federal law now restricts the deduction of business interest, limiting the deduction to 30 percent of modified income, with the ability to carry the remainder forward to future tax years. This change was intended to eliminate the bias in favor of debt financing over equity financing in the federal code, but particularly when states adopt this limitation without incorporating its counterbalancing provision, full expensing, the result is higher investment costs.

Thirty-five states conform to the net interest limitation. Historically, states have largely avoided taxing international income. Following federal tax reform, however, some states have latched onto the federal provision for the taxation of Global Low-Taxed Intangible Income GILTI , intended as a guardrail for the new federal territorial system of taxation, as a means to broaden their tax bases to include foreign business activity. States which tax GILTI are penalized in the Index , while states receive partial credit for moderate taxation of GILTI for instance, by adopting the Section deduction and are rewarded for decoupling or almost fully decoupling from GILTI by, for instance, treating it as largely-deductible foreign dividend income in addition to providing the Section deduction.

Many states provide tax credits which lower the effective tax rates for certain industries and investments, often for large firms from out of state that are considering a move. Policymakers create these deals under the banner of job creation and economic development, but the truth is that if a state needs to offer such packages, it is most likely covering for a bad business tax climate. Economic development and job creation tax credits complicate the tax system, narrow the tax base, drive up tax rates for companies that do not qualify, distort the free market, and often fail to achieve economic growth.

A more effective approach is to systematically improve the business tax climate for the long term. Thus, this component rewards those states that do not offer the following tax credits, with states that offer them scoring poorly. Investment Tax Credits. Investment tax credits typically offer an offset against tax liability if the company invests in new property, plants, equipment, or machinery in the state offering the credit.

Investment tax credits distort the market by rewarding investment in new property as opposed to the renovation of old property. Job Tax Credits. Job tax credits typically offer an offset against tax liability if the company creates a specified number of jobs over a specified period of time. Even if administered efficiently, job tax credits can misfire in a number of ways. They induce businesses whose economic position would be best served by spending more on new equipment or marketing to hire new employees instead.

They also favor businesses that are expanding anyway, punishing firms that are already struggling. Thus, states that offer such credits score poorly on the Index. In practice, their negative side effects—greatly complicating the tax system and establishing a government agency as the arbiter of what types of research meet a criterion so difficult to assess—far outweigh the potential benefits.

The individual income tax component, which accounts for Another important reason individual income tax rates are critical for businesses is the cost of labor. Labor typically constitutes a major business expense, so anything that hurts the labor pool will also affect business decisions and the economy. Complex, poorly designed tax systems that extract an inordinate amount of tax revenue reduce both the quantity and quality of the labor pool.

This is consistent with the findings of Wasylenko and McGuire , who found that individual income taxes affect businesses indirectly by influencing the location decisions of individuals. A rational person would choose to work for another hour. In the aggregate, the income tax reduces the available labor supply.

The individual income tax rate subindex measures the impact of tax rates on the marginal dollar of individual income using three criteria: the top tax rate, the graduated rate structure, and the standard deduction s and exemptions which are treated as a zero percent tax bracket. The rates and brackets used are for a single taxpayer, not a couple filing a joint return. The individual income tax base subindex takes into account measures enacted to prevent double taxation, whether the code is indexed for inflation, and how the tax code treats married couples compared to singles.

States that score well protect married couples from being taxed more severely than if they had filed as two single individuals. They also protect taxpayers from double taxation by recognizing LLCs and S corporations under the individual tax code and indexing their brackets, exemptions, and deductions for inflation.

States that do not impose an individual income tax generally receive a perfect score, and states that do impose an individual income tax will generally score well if they have a flat, low tax rate with few deductions and exemptions. States that score poorly have complex, multiple-rate systems. The six states without an individual income tax or non-UI payroll tax are, not surprisingly, the highest scoring states on this component: Alaska, Florida, South Dakota, Texas, Washington, and Wyoming.

Nevada, which taxes wage income but not unearned income at a low rate under a non-UI payroll tax, also does extremely well in this component of the Index. New Hampshire and Tennessee also score well, because while they levy a significant tax on individual income in the form of interest and dividends, they do not tax wages and salaries. Scoring near the bottom of this component are states that have high tax rates and very progressive bracket structures.

They generally fail to index their brackets, exemptions, and deductions for inflation, do not allow for deductions of foreign or other state taxes, penalize married couples filing jointly, and do not recognize LLCs and S corporations. The rate subindex compares the states that tax individual income after setting aside the four states that do not and therefore receive perfect scores: Alaska, Florida, South Dakota, and Wyoming.

Texas and Washington do not have an individual income tax, but they do tax LLC and S corporation income through their gross receipts taxes and thus do not score perfectly in this component. Nevada has a low-rate payroll tax on wage income. New Hampshire and Tennessee, meanwhile, do not tax wage and salary income but do tax interest and dividend income. Top Marginal Tax Rate.

California has the highest top income tax rate of Other states with high top rates include Hawaii States with the lowest top statutory rates are North Dakota 2. Alabama, Kentucky, Mississippi, New Hampshire, and Oklahoma all impose a top statutory rate of 5 percent.

In addition to statewide income tax rates, some states allow local-level income taxes. In some cases, states authorizing local-level income taxes still keep the level of income taxation modest overall. For instance, Alabama, Indiana, Michigan, and Pennsylvania allow local income add-ons, but are still among the states with the lowest overall rates. Top Tax Bracket Threshold.

This variable assesses the degree to which pass-through businesses are subject to reduced after-tax return on investment as net income rises. States are rewarded for a top rate that kicks in at lower levels of income, because doing so approximates a less distortionary flat-rate system.

For example, Alabama has a progressive income tax structure with three income tax rates. States with flat-rate systems score the best on this variable because their top rate kicks in at the first dollar of income after accounting for the standard deduction and personal exemption. States with high kick-in levels score the worst. The Index converts exemptions and standard deductions to a zero bracket before tallying income tax brackets.

From an economic perspective, standard deductions and exemptions are equivalent to an additional tax bracket with a zero tax rate. The size of allowed standard deductions and exemptions varies considerably. Pennsylvania scores the best in this variable by having only one tax bracket that is, a flat tax with no standard deduction. On the other end of the spectrum, Hawaii scores worst with 13 brackets, followed by California with 11 brackets, and Iowa and Missouri with nine brackets.

Average Width of Brackets. Many states have several narrow tax brackets close together at the low end of the income scale, including a zero bracket created by standard deductions and exemptions. Most taxpayers never notice them, because they pass so quickly through those brackets and pay the top rate on most of their income. On the other hand, some states impose ever-increasing rates throughout the income spectrum, causing individuals and noncorporate businesses to alter their income-earning and tax-planning behavior.

This subindex penalizes the latter group of states by measuring the average width of the brackets, rewarding those states where the average width is small, since in these states the top rate is levied on most income, acting more like a flat rate on all income. Income Recapture. Income recapture provisions are poor policy, because they result in dramatically high marginal tax rates at the point of their kick-in, and they are nontransparent in that they raise tax burdens substantially without being reflected in the statutory rate.

States have different definitions of taxable income, and some create greater impediments to economic activity than others. The base subindex gives a 10 percent weight to the marriage penalty , a 40 percent weight to the double taxation of taxable income, and a 50 percent weight to an accumulation of other base issues, including indexation.

The states with no individual income tax of any kind achieve perfect neutrality. Of the other 43 states, Tennessee, Arizona, Idaho, Illinois, Maine, Michigan, Missouri, Montana, and Nebraska have the best scores, avoiding many problems with the definition of taxable income that plague other states.

Meanwhile, states where the tax base is found to cause an unnecessary drag on economic activity include New Jersey, California, Ohio, Minnesota, Maryland, Delaware, and New York. Marriage Penalty. As a result, two singles if combined can have a lower tax bill than a married couple filing jointly with the same income. This is discriminatory and has serious business ramifications. The top-earning 20 percent of taxpayers is dominated 85 percent by married couples.

This same 20 percent also has the highest concentration of business owners of all income groups Hodge A, Hodge B. Because of these concentrations, marriage penalties have the potential to affect a significant share of pass-through businesses. Twenty-three states and the District of Columbia have marriage penalties built into their income tax brackets.

Some states attempt to get around the marriage penalty problem by allowing married couples to file as if they were singles or by offering an offsetting tax credit. While helpful in offsetting the dollar cost of the marriage penalty, these solutions come at the expense of added tax complexity.

Still, states that allow for married couples to file as singles do not receive a marriage penalty score reduction. Double Taxation of Capital Income. Since most states with an individual income tax system mimic the federal income tax code, they also possess its greatest flaw: the double taxation of capital income. Double taxation is brought about by the interaction between the corporate income tax and the individual income tax.

The ultimate source of most capital income—interest, dividends, and capital gains—is corporate profits. The corporate income tax reduces the level of profits that can eventually be used to generate interest or dividend payments or capital gains. The result is the double taxation of this capital income—first at the corporate level and again on the individual level.

All states that tax wage income score poorly by this criterion. Tennessee and New Hampshire, which tax individuals on interest and dividends, score somewhat better because they do not tax capital gains. Five states score poorly because they do not conform to federal definitions of individual income: Alabama, Arkansas, Mississippi, New Jersey, and Pennsylvania.

At the federal level, the Alternative Minimum Tax AMT was created in to ensure that all taxpayers paid some minimum level of taxes every year. Unfortunately, it does so by creating a parallel tax system to the standard individual income tax code. AMTs are an inefficient way to prevent tax deductions and credits from totally eliminating tax liability. This variable measures the extent of double taxation on income used to pay foreign and state taxes, i.

States can avoid double taxation by allowing a credit for state taxes paid to other jurisdictions. One important development in the federal tax system was the creation of the limited liability corporation LLC and the S corporation. LLCs and S corporations provide businesses some of the benefits of incorporation, such as limited liability, without the overhead of becoming a traditional C corporation.

The profits of these entities are taxed under the individual income tax code, which avoids the double taxation problems that plague the corporate income tax system. Indexing the tax code for inflation is critical in order to prevent de facto tax increases on the nominal increase in income due to inflation.

Three areas of the individual income tax are commonly indexed for inflation: the standard deduction, personal exemptions, and tax brackets. Twenty-five states index all three or do not impose an individual income tax; 15 states and the District of Columbia index one or two of the three; and ten states do not index at all.

Sales tax makes up The type of sales tax familiar to taxpayers is a tax levied on the purchase price of a good at the point of sale. The sales tax can also hurt the business tax climate because as the sales tax rate climbs, customers make fewer purchases or seek low-tax alternatives. As a result, business is lost to lower-tax locations, causing lost profits, lost jobs, and lost tax revenue. Typically, a vast expanse of shopping malls springs up along the border in the low-tax jurisdiction.

On the positive side, sales taxes levied on goods and services at the point of sale to the end-user have at least two virtues. First, they are transparent: the tax is never confused with the price of goods by customers. Second, since they are levied at the point of sale, they are less likely to cause economic distortions than taxes levied at some intermediate stage of production such as a gross receipts tax or sales taxes on business-to-business transactions.

The negative impact of sales taxes is well documented in the economic literature and through anecdotal evidence. For example, Bartik found that high sales taxes, especially sales taxes levied on equipment, had a negative effect on small business start-ups. States that create the most tax pyramiding and economic distortion, and therefore score the worst, are states that levy a sales tax that generally allows no exclusions for business inputs. The ideal base for sales taxation is all goods and services at the point of sale to the end-user.

Excise taxes are sales taxes levied on specific goods. Goods subject to excise taxation are typically but not always perceived to be luxuries or vices, the latter of which are less sensitive to drops in demand when the tax increases their price.

Examples typically include tobacco, liquor, and gasoline. The sales tax component of the Index takes into account the excise tax rates each state levies. The five states without a state sales tax—Alaska, [27] Delaware, Montana, New Hampshire, and Oregon—achieve the best sales tax component scores. Among states with a sales tax, those with low general rates and broad bases, and which avoid tax pyramiding , do best.

Wyoming, Wisconsin, Maine, Idaho, Michigan, and Virginia all do well, with well-structured sales taxes and modest excise tax rates. At the other end of the spectrum, Alabama, Louisiana, Washington, Tennessee, and Arkansas fare the worst, imposing high rates and taxing a range of business inputs, such as utilities, services, manufacturing, and leases—and maintaining relatively high excise taxes. Tennessee has the highest combined state and local rate of 9. In general, these states levy high sales tax rates that apply to most or all business input items.

The tax rate itself is important, and a state with a high sales tax rate reduces demand for in-state retail sales. Consumers will turn more frequently to cross-border sales, leaving less business activity in the state. This subindex measures the highest possible sales tax rate applicable to in-state retail shopping and taxable business-to-business transactions.

Four states—Delaware, Montana, New Hampshire, and Oregon—do not have state or local sales taxes and thus are given a rate of zero. Alaska is sometimes counted among states with no sales tax since it does not levy a statewide sales tax. However, Alaska localities are allowed to levy sales taxes and the weighted statewide average of these taxes is 1. The Index measures the state and local sales tax rate in each state. A combined rate is computed by adding the general state rate to the weighted average of the county and municipal rates.

State Sales Tax Rate. At the other end is California with a 7. Other states with high statewide rates include Minnesota 6. Local Option Sales Tax Rates. Alabama and Louisiana have the highest average local option sales taxes 5. Other states with high local option sales taxes include Colorado 4.

States with the highest combined state and average local sales tax rates are Tennessee 9. At the low end are Alaska 1. Remote Seller Protections. While most states have adopted safe harbors for small sellers and have a single point of administration for all state and local sales taxes, a few diverge from these practices, imposing substantial compliance costs on out-of-state retailers. Alabama, Alaska which only has local sales taxes , Colorado, and Louisiana lack uniform administration, while Kansas does not offer a safe harbor for small sellers.

The top five states on this subindex—New Hampshire, Delaware, Montana, Oregon, and Alaska—are the five states without a general state sales tax. However, none receives a perfect score because each levies gasoline, diesel, tobacco, and beer excise taxes. States like Wyoming, Kansas, Colorado, Idaho, Missouri, and Nebraska achieve high scores on their tax base by avoiding the problems of tax pyramiding and adhering to low excise tax rates, though of these, Colorado receives poor marks for a lack of local base conformity.

Their tax systems hamper economic growth by including too many business inputs, excluding too many consumer goods and services, and imposing excessive rates of excise taxation. When a business must pay sales taxes on manufacturing equipment and raw materials, then that tax becomes part of the price of whatever the business makes with that equipment and those materials. The business must then collect sales tax on its own products, with the result that a tax is being charged on a price that already contains taxes.

This tax pyramiding invariably results in some industries being taxed more heavily than others, which violates the principle of neutrality and causes economic distortions. These variables are often inputs to other business operations. For example, a manufacturing firm will count the cost of transporting its final goods to retailers as a significant cost of doing business. But how do you buy municipal bonds? Because the big guys have already swallowed up the lowest-risk, highest-yielding bonds on their own, individual investors just can't get their hands on them ….

You can do this via municipal bond funds, which are issued by the major bond buyers, who in turn use your cash to go and buy more muni bonds. If you're going to buy municipal bond funds, consider buying closed-end funds CEFs. For one, because of how they're constructed, CEFs can trade at a discount, allowing you to buy their net assets for less than if you bought those bonds outright.

That also means CEFs can afford to pay higher dividends. The payouts are even bigger when you consider they're tax-advantaged. If you consider just federal taxes alone, at the highest tax bracket, you'd need a roughly 7. That number is even higher if state or local tax breaks come into play. Read on as we look at three of the best municipal bond funds on the market right now. Data is as of July 1. Distributions can be a combination of dividends, interest income, realized capital gains and return of capital.

Distribution rate is an annualized reflection of the most recent payout and is a standard measure for CEFs. Fund expenses include interest expenses and are provided by Morningstar. That high discount also makes SBI's reasonable 3. That's because SBI really only needs to yield a roughly 2. In fact, given that the average coupon of SBI's portfolio is 4.

But even if that doesn't happen, you're still getting a tax-equivalent yield of 5. Holdings include municipal bonds tethered to things such as transportation, industrial revenue, power, and water and sewer. As you'll see in a moment, you can certainly get better yields out of municipal bond CEFs.

But if you want a pretty reliable payout that's better than the 1. Just note that because of leverage, its price often will be more volatile than the likes of MUB. That might sound alarm bells for risk-averse investors. But understand that, based on Moody's data from to , muni bonds have a very low default rate of less than 0. Moreover, the Federal Reserve is lending a hand by buying up municipal bonds. Spreading out assets across roughly holdings helps tamp down risk somewhat, too.

Another factor helping out the yield — and reducing risk for new money — is a deep None of this means you can completely escape the potential risk of greater muni-bond defaults should the economy's turnaround take much longer than hoped for.

But if you're really looking for minimal risk, you're better off avoiding munis altogether and seeking out Treasuries or money-market funds. That makes it one of the most heavily mispriced municipal bond funds on the market. This lowers the appeal of many bond investors in other states who feel uncomfortable with or alienated by a bond from another part of the country.

Without beating around the bush, let me just say what's on all of our minds when it comes to taxes: They stink!

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Most tax friendly investments for 2021 Companies, Stock Quotes. North Dakota. Professor John Mikesell of Indiana University estimates that, nationwide, sales taxes extend to about 36 percent of all final consumer transactions. There are three basic charging methods:. There is a solution to these problems: municipal bonds, and municipal bond funds.
Most tax friendly investments for 2021 16
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Is silver a good investment for 2021 These variables are often inputs to other business operations. This is the message of the Tax Plan. Newly formed businesses, naturally, do not qualify for an experience rating because they have no significant employment history on which to base the rating. Most firms, small and large alike, hire accountants, lawyers, and other professional service providers. Taxable income is the amount of income subject to tax, after deductions and exemptions.
Most tax friendly investments for 2021 South Dakota has no state income tax, and its state-levied tax is just 4. Experience Rating Formula. Read this article in : Hindi. In most cases, these contributions are rewarded with a lower rate schedule, often saving the business more money in taxes than was paid through the contribution. Among states with a sales tax, those with low general rates and broad bases, and which avoid tax pyramidingdo best. Florida is an especially popular destination for retireesand with good reason: There's no state income tax, and therefore no tax on any retirement income.
Most tax friendly investments for 2021 Reason is, in the dividend option, the DDT is deducted irrespective of your tax bracket, though the net dividend is tax-free in your hands. The corporate income tax is designed to tax only the profits of a nz aud forex. If a subindex is composed only of scalar variables, then they are weighted equally. This variable rewards states which remove, or substantially remove, business tangible personal property from their tax base. The average tax rate is the total tax paid divided by total income earned. As you'll see in a moment, you can certainly get better yields out of municipal bond CEFs. They also observed that studies focused on a single topic do better at explaining economic growth at borders.
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Most tax friendly investments for 2021 Investing Here, we take a look at 5 top-rated muni funds. This subindex penalizes the latter group of states by measuring the average width of the brackets, rewarding those states where the average width is small, since in these states the top rate is levied on most income, acting more like a flat rate on all income. Related Articles. States have different definitions of taxable income, and some create greater impediments to economic activity than others.

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OPTIONS AS A STRATEGIC INVESTMENT BOOK REVIEW

Many states provide tax credits which lower the effective tax rates for certain industries and investments, often for large firms from out of state that are considering a move. Policymakers create these deals under the banner of job creation and economic development, but the truth is that if a state needs to offer such packages, it is most likely covering for a bad business tax climate. Economic development and job creation tax credits complicate the tax system, narrow the tax base, drive up tax rates for companies that do not qualify, distort the free market, and often fail to achieve economic growth.

A more effective approach is to systematically improve the business tax climate for the long term. Thus, this component rewards those states that do not offer the following tax credits, with states that offer them scoring poorly.

Investment Tax Credits. Investment tax credits typically offer an offset against tax liability if the company invests in new property, plants, equipment, or machinery in the state offering the credit. Investment tax credits distort the market by rewarding investment in new property as opposed to the renovation of old property. Job Tax Credits. Job tax credits typically offer an offset against tax liability if the company creates a specified number of jobs over a specified period of time.

Even if administered efficiently, job tax credits can misfire in a number of ways. They induce businesses whose economic position would be best served by spending more on new equipment or marketing to hire new employees instead. They also favor businesses that are expanding anyway, punishing firms that are already struggling. Thus, states that offer such credits score poorly on the Index. In practice, their negative side effects—greatly complicating the tax system and establishing a government agency as the arbiter of what types of research meet a criterion so difficult to assess—far outweigh the potential benefits.

The individual income tax component, which accounts for Another important reason individual income tax rates are critical for businesses is the cost of labor. Labor typically constitutes a major business expense, so anything that hurts the labor pool will also affect business decisions and the economy.

Complex, poorly designed tax systems that extract an inordinate amount of tax revenue reduce both the quantity and quality of the labor pool. This is consistent with the findings of Wasylenko and McGuire , who found that individual income taxes affect businesses indirectly by influencing the location decisions of individuals.

A rational person would choose to work for another hour. In the aggregate, the income tax reduces the available labor supply. The individual income tax rate subindex measures the impact of tax rates on the marginal dollar of individual income using three criteria: the top tax rate, the graduated rate structure, and the standard deduction s and exemptions which are treated as a zero percent tax bracket.

The rates and brackets used are for a single taxpayer, not a couple filing a joint return. The individual income tax base subindex takes into account measures enacted to prevent double taxation, whether the code is indexed for inflation, and how the tax code treats married couples compared to singles. States that score well protect married couples from being taxed more severely than if they had filed as two single individuals. They also protect taxpayers from double taxation by recognizing LLCs and S corporations under the individual tax code and indexing their brackets, exemptions, and deductions for inflation.

States that do not impose an individual income tax generally receive a perfect score, and states that do impose an individual income tax will generally score well if they have a flat, low tax rate with few deductions and exemptions. States that score poorly have complex, multiple-rate systems. The six states without an individual income tax or non-UI payroll tax are, not surprisingly, the highest scoring states on this component: Alaska, Florida, South Dakota, Texas, Washington, and Wyoming.

Nevada, which taxes wage income but not unearned income at a low rate under a non-UI payroll tax, also does extremely well in this component of the Index. New Hampshire and Tennessee also score well, because while they levy a significant tax on individual income in the form of interest and dividends, they do not tax wages and salaries.

Scoring near the bottom of this component are states that have high tax rates and very progressive bracket structures. They generally fail to index their brackets, exemptions, and deductions for inflation, do not allow for deductions of foreign or other state taxes, penalize married couples filing jointly, and do not recognize LLCs and S corporations.

The rate subindex compares the states that tax individual income after setting aside the four states that do not and therefore receive perfect scores: Alaska, Florida, South Dakota, and Wyoming. Texas and Washington do not have an individual income tax, but they do tax LLC and S corporation income through their gross receipts taxes and thus do not score perfectly in this component.

Nevada has a low-rate payroll tax on wage income. New Hampshire and Tennessee, meanwhile, do not tax wage and salary income but do tax interest and dividend income. Top Marginal Tax Rate. California has the highest top income tax rate of Other states with high top rates include Hawaii States with the lowest top statutory rates are North Dakota 2. Alabama, Kentucky, Mississippi, New Hampshire, and Oklahoma all impose a top statutory rate of 5 percent.

In addition to statewide income tax rates, some states allow local-level income taxes. In some cases, states authorizing local-level income taxes still keep the level of income taxation modest overall. For instance, Alabama, Indiana, Michigan, and Pennsylvania allow local income add-ons, but are still among the states with the lowest overall rates. Top Tax Bracket Threshold.

This variable assesses the degree to which pass-through businesses are subject to reduced after-tax return on investment as net income rises. States are rewarded for a top rate that kicks in at lower levels of income, because doing so approximates a less distortionary flat-rate system. For example, Alabama has a progressive income tax structure with three income tax rates.

States with flat-rate systems score the best on this variable because their top rate kicks in at the first dollar of income after accounting for the standard deduction and personal exemption. States with high kick-in levels score the worst. The Index converts exemptions and standard deductions to a zero bracket before tallying income tax brackets.

From an economic perspective, standard deductions and exemptions are equivalent to an additional tax bracket with a zero tax rate. The size of allowed standard deductions and exemptions varies considerably. Pennsylvania scores the best in this variable by having only one tax bracket that is, a flat tax with no standard deduction.

On the other end of the spectrum, Hawaii scores worst with 13 brackets, followed by California with 11 brackets, and Iowa and Missouri with nine brackets. Average Width of Brackets. Many states have several narrow tax brackets close together at the low end of the income scale, including a zero bracket created by standard deductions and exemptions.

Most taxpayers never notice them, because they pass so quickly through those brackets and pay the top rate on most of their income. On the other hand, some states impose ever-increasing rates throughout the income spectrum, causing individuals and noncorporate businesses to alter their income-earning and tax-planning behavior. This subindex penalizes the latter group of states by measuring the average width of the brackets, rewarding those states where the average width is small, since in these states the top rate is levied on most income, acting more like a flat rate on all income.

Income Recapture. Income recapture provisions are poor policy, because they result in dramatically high marginal tax rates at the point of their kick-in, and they are nontransparent in that they raise tax burdens substantially without being reflected in the statutory rate. States have different definitions of taxable income, and some create greater impediments to economic activity than others. The base subindex gives a 10 percent weight to the marriage penalty , a 40 percent weight to the double taxation of taxable income, and a 50 percent weight to an accumulation of other base issues, including indexation.

The states with no individual income tax of any kind achieve perfect neutrality. Of the other 43 states, Tennessee, Arizona, Idaho, Illinois, Maine, Michigan, Missouri, Montana, and Nebraska have the best scores, avoiding many problems with the definition of taxable income that plague other states.

Meanwhile, states where the tax base is found to cause an unnecessary drag on economic activity include New Jersey, California, Ohio, Minnesota, Maryland, Delaware, and New York. Marriage Penalty. As a result, two singles if combined can have a lower tax bill than a married couple filing jointly with the same income.

This is discriminatory and has serious business ramifications. The top-earning 20 percent of taxpayers is dominated 85 percent by married couples. This same 20 percent also has the highest concentration of business owners of all income groups Hodge A, Hodge B. Because of these concentrations, marriage penalties have the potential to affect a significant share of pass-through businesses. Twenty-three states and the District of Columbia have marriage penalties built into their income tax brackets.

Some states attempt to get around the marriage penalty problem by allowing married couples to file as if they were singles or by offering an offsetting tax credit. While helpful in offsetting the dollar cost of the marriage penalty, these solutions come at the expense of added tax complexity. Still, states that allow for married couples to file as singles do not receive a marriage penalty score reduction.

Double Taxation of Capital Income. Since most states with an individual income tax system mimic the federal income tax code, they also possess its greatest flaw: the double taxation of capital income. Double taxation is brought about by the interaction between the corporate income tax and the individual income tax.

The ultimate source of most capital income—interest, dividends, and capital gains—is corporate profits. The corporate income tax reduces the level of profits that can eventually be used to generate interest or dividend payments or capital gains.

The result is the double taxation of this capital income—first at the corporate level and again on the individual level. All states that tax wage income score poorly by this criterion. Tennessee and New Hampshire, which tax individuals on interest and dividends, score somewhat better because they do not tax capital gains. Five states score poorly because they do not conform to federal definitions of individual income: Alabama, Arkansas, Mississippi, New Jersey, and Pennsylvania.

At the federal level, the Alternative Minimum Tax AMT was created in to ensure that all taxpayers paid some minimum level of taxes every year. Unfortunately, it does so by creating a parallel tax system to the standard individual income tax code. AMTs are an inefficient way to prevent tax deductions and credits from totally eliminating tax liability. This variable measures the extent of double taxation on income used to pay foreign and state taxes, i. States can avoid double taxation by allowing a credit for state taxes paid to other jurisdictions.

One important development in the federal tax system was the creation of the limited liability corporation LLC and the S corporation. LLCs and S corporations provide businesses some of the benefits of incorporation, such as limited liability, without the overhead of becoming a traditional C corporation. The profits of these entities are taxed under the individual income tax code, which avoids the double taxation problems that plague the corporate income tax system.

Indexing the tax code for inflation is critical in order to prevent de facto tax increases on the nominal increase in income due to inflation. Three areas of the individual income tax are commonly indexed for inflation: the standard deduction, personal exemptions, and tax brackets. Twenty-five states index all three or do not impose an individual income tax; 15 states and the District of Columbia index one or two of the three; and ten states do not index at all. Sales tax makes up The type of sales tax familiar to taxpayers is a tax levied on the purchase price of a good at the point of sale.

The sales tax can also hurt the business tax climate because as the sales tax rate climbs, customers make fewer purchases or seek low-tax alternatives. As a result, business is lost to lower-tax locations, causing lost profits, lost jobs, and lost tax revenue. Typically, a vast expanse of shopping malls springs up along the border in the low-tax jurisdiction. On the positive side, sales taxes levied on goods and services at the point of sale to the end-user have at least two virtues.

First, they are transparent: the tax is never confused with the price of goods by customers. Second, since they are levied at the point of sale, they are less likely to cause economic distortions than taxes levied at some intermediate stage of production such as a gross receipts tax or sales taxes on business-to-business transactions. The negative impact of sales taxes is well documented in the economic literature and through anecdotal evidence.

For example, Bartik found that high sales taxes, especially sales taxes levied on equipment, had a negative effect on small business start-ups. States that create the most tax pyramiding and economic distortion, and therefore score the worst, are states that levy a sales tax that generally allows no exclusions for business inputs.

The ideal base for sales taxation is all goods and services at the point of sale to the end-user. Excise taxes are sales taxes levied on specific goods. Goods subject to excise taxation are typically but not always perceived to be luxuries or vices, the latter of which are less sensitive to drops in demand when the tax increases their price.

Examples typically include tobacco, liquor, and gasoline. The sales tax component of the Index takes into account the excise tax rates each state levies. The five states without a state sales tax—Alaska, [27] Delaware, Montana, New Hampshire, and Oregon—achieve the best sales tax component scores.

Among states with a sales tax, those with low general rates and broad bases, and which avoid tax pyramiding , do best. Wyoming, Wisconsin, Maine, Idaho, Michigan, and Virginia all do well, with well-structured sales taxes and modest excise tax rates. At the other end of the spectrum, Alabama, Louisiana, Washington, Tennessee, and Arkansas fare the worst, imposing high rates and taxing a range of business inputs, such as utilities, services, manufacturing, and leases—and maintaining relatively high excise taxes.

Tennessee has the highest combined state and local rate of 9. In general, these states levy high sales tax rates that apply to most or all business input items. The tax rate itself is important, and a state with a high sales tax rate reduces demand for in-state retail sales. Consumers will turn more frequently to cross-border sales, leaving less business activity in the state. This subindex measures the highest possible sales tax rate applicable to in-state retail shopping and taxable business-to-business transactions.

Four states—Delaware, Montana, New Hampshire, and Oregon—do not have state or local sales taxes and thus are given a rate of zero. Alaska is sometimes counted among states with no sales tax since it does not levy a statewide sales tax. However, Alaska localities are allowed to levy sales taxes and the weighted statewide average of these taxes is 1.

The Index measures the state and local sales tax rate in each state. A combined rate is computed by adding the general state rate to the weighted average of the county and municipal rates. State Sales Tax Rate. At the other end is California with a 7.

Other states with high statewide rates include Minnesota 6. Local Option Sales Tax Rates. Alabama and Louisiana have the highest average local option sales taxes 5. Other states with high local option sales taxes include Colorado 4. States with the highest combined state and average local sales tax rates are Tennessee 9.

At the low end are Alaska 1. Remote Seller Protections. While most states have adopted safe harbors for small sellers and have a single point of administration for all state and local sales taxes, a few diverge from these practices, imposing substantial compliance costs on out-of-state retailers. Alabama, Alaska which only has local sales taxes , Colorado, and Louisiana lack uniform administration, while Kansas does not offer a safe harbor for small sellers.

The top five states on this subindex—New Hampshire, Delaware, Montana, Oregon, and Alaska—are the five states without a general state sales tax. However, none receives a perfect score because each levies gasoline, diesel, tobacco, and beer excise taxes. States like Wyoming, Kansas, Colorado, Idaho, Missouri, and Nebraska achieve high scores on their tax base by avoiding the problems of tax pyramiding and adhering to low excise tax rates, though of these, Colorado receives poor marks for a lack of local base conformity.

Their tax systems hamper economic growth by including too many business inputs, excluding too many consumer goods and services, and imposing excessive rates of excise taxation. When a business must pay sales taxes on manufacturing equipment and raw materials, then that tax becomes part of the price of whatever the business makes with that equipment and those materials.

The business must then collect sales tax on its own products, with the result that a tax is being charged on a price that already contains taxes. This tax pyramiding invariably results in some industries being taxed more heavily than others, which violates the principle of neutrality and causes economic distortions. These variables are often inputs to other business operations. For example, a manufacturing firm will count the cost of transporting its final goods to retailers as a significant cost of doing business.

Most firms, small and large alike, hire accountants, lawyers, and other professional service providers. If these services are taxed, then it is more expensive for every business to operate. To understand how business-to-business sales taxes can distort the market, suppose a sales tax were levied on the sale of flour to a bakery. The bakery is not the end-user because the flour will be baked into bread and sold to consumers.

Economic theory is not clear as to which party will ultimately bear the burden of the tax. If customers tend not to change their bread-buying habits when the price rises, then the tax can be fully passed forward onto consumers. However, if the consumer reacts to higher prices by buying less, then the tax will have to be absorbed by the bakery as an added cost of doing business. The hypothetical sales tax on all flour sales would distort the market, because different businesses that use flour have customers with varying price sensitivity.

Suppose the bakery is able to pass the entire tax on flour forward to the consumer but the pizzeria down the street cannot. The owners of the pizzeria would face a higher cost structure and profits would drop. Since profits are the market signal for opportunity, the tax would tilt the market away from pizza-making.

Fewer entrepreneurs would enter the pizza business, and existing businesses would hire fewer people. In both cases, the sales tax charged to purchasers of bread and pizza would be partly a tax on a tax because the tax on flour would be built into the price. Economists call this tax pyramiding, and public finance scholars overwhelmingly oppose applying the sales tax to business inputs due to the resulting pyramiding and lack of transparency.

Besley and Rosen found that for many products, the after-tax price of the good increased by the same amount as the tax itself. That means a sales tax increase was passed along to consumers on a one-for-one basis. For other goods, however, they found that the price of the good rose by twice the amount of the tax, meaning that the tax increase translates into an even larger burden for consumers than is typically thought. Note that these inputs should only be exempt from sales tax if they are truly inputs into the production process.

Hawaii, New Mexico, South Dakota, and Washington are examples of states that tax many business inputs. Sales Tax Breadth. An economically neutral sales tax base includes all final retail sales of goods and services purchased by the end-users. In practice, however, states tend to include most goods, but relatively few services, in their sales tax bases, a growing issue in an increasingly service-oriented economy.

Professor John Mikesell of Indiana University estimates that, nationwide, sales taxes extend to about 36 percent of all final consumer transactions. A well-structured sales tax, however, does not fall upon business inputs. Therefore, states that tax services that are business inputs score poorly on the Index , while states are rewarded for expanding their base to include more final retail sales of goods and services.

Sales Tax on Gasoline. There is no economic reason to exempt gasoline from the sales tax, as it is a final retail purchase by consumers. However, all but seven states do so. While all states levy an excise tax on gasoline, these funds are often dedicated for transportation purposes, making them a form of user tax distinct from the general sales tax. The five states that fully include gasoline in their sales tax base Florida, Hawaii, Illinois, Indiana, and Michigan get a better score.

Several other states receive partial credit for applying an ad valorem tax to gasoline sales, but at a different rate than for the general sales tax. New York applies local sales taxes only. Sales Tax on Groceries. A well-structured sales tax includes all end-user goods in the tax base, to keep the base broad, rates low, and prevent distortions in the marketplace.

Many states exempt groceries to reduce the incidence of the sales tax on low-income residents. Such an exemption, however, also benefits grocers and higher-income residents, and creates additional compliance costs due to the necessity of maintaining complex, ever-changing lists of exempt and nonexempt products.

Thirteen states include or partially include groceries in their sales tax base. Many excise taxes are intended to reduce consumption of the product bearing the tax. Others, like the gasoline tax, are often used und specific projects such as road construction. Gasoline and diesel excise taxes levied per gallon are usually justified as a form of user tax paid by those who benefit from road construction and maintenance. Though gas taxes—along with tolls—are one of the best ways to raise revenue for transportation projects roughly approximating a user fee for infrastructure use , gasoline represents a large input for most businesses, so states that levy higher rates have a less competitive business tax climate.

State excise taxes on gasoline range from General sales tax rates that apply to gasoline are included in this calculated rate, but states which include, or partially include, gasoline in the sales tax base are rewarded in the sales tax breadth measure. Tobacco, spirits, and beer excise taxes can discourage in-state consumption and encourage consumers to seek lower prices in neighboring jurisdictions Moody and Warcholik, This impacts a wide swath of retail outlets, such as convenience stores, that move large volumes of tobacco and beer products.

The problem is exacerbated for those retailers located near the border of states with lower excise taxes as consumers move their shopping out of state—referred to as cross-border shopping. There is also the growing problem of cross-border smuggling of products from states and areas that levy low excise taxes on tobacco into states that levy high excise taxes on tobacco.

This both increases criminal activity and reduces taxable sales by legitimate retailers. The property tax component, which includes taxes on real and personal property, net worth, and the transfer of assets, accounts for When properly structured, property taxes exceed most other taxes in comporting with the benefit principle and can be fairly economically efficient.

Property taxes matter to businesses, and the tax rate on commercial property is often higher than the tax on comparable residential property. Additionally, many localities and states levy taxes on the personal property or equipment owned by a business. They can be on assets ranging from cars to machinery and equipment to office furniture and fixtures, but are separate from real property taxes, which are taxes on land and buildings.

The property taxes included tax on real, personal, and utility property owned by businesses Phillips et al. Since property taxes can be a large burden on business, they can have a significant effect on location decisions.

Mark, McGuire, and Papke find taxes that vary from one location to another within a region could be uniquely important determinants of intraregional location decisions. They find that higher rates of two business taxes—the sales tax and the personal property tax—are associated with lower employment growth. They estimate that a tax hike on personal property of one percentage point reduces annual employment growth by 2.

Bartik , finding that property taxes are a significant factor in business location decisions, estimates that a 10 percent increase in business property taxes decreases the number of new plants opening in a state by between 1 and 2 percent. Bartik backs up his earlier findings by concluding that higher property taxes negatively affect the establishment of small businesses. He elaborates that the particularly strong negative effect of property taxes occurs because they are paid regardless of profits, and many small businesses are not profitable in their first few years, so high property taxes would be more influential than profit-based taxes on the start-up decision.

States which keep statewide property taxes low better position themselves to attract business investment. Localities competing for business can put themselves at a greater competitive advantage by keeping personal property taxes low.

Taxes on capital stock, tangible and intangible property, inventory, real estate transfers, estates, inheritance, and gifts are also included in the property tax component of the Index. These states generally have low rates of property tax, whether measured per capita or as a percentage of income. They also avoid distortionary taxes like estate, inheritance, gift, and other wealth tax es.

These states generally have high property tax rates and levy several wealth-based taxes. The property tax portion of the Index is composed of two equally weighted subindices devoted to measuring the economic impact of both rates and bases. The rate subindex consists of property tax collections measured both per capita and as a percentage of personal income and capital stock taxes.

The base portion consists of dummy variables detailing whether each state levies wealth taxes such as inheritance, estate, gift, inventory, intangible property, and other similar taxes. The property tax rate subindex consists of property tax collections per capita 40 percent of the subindex score , property tax collections as a percent of personal income 40 percent of the subindex score , and capital stock taxes 20 percent of the subindex score.

The heavy weighting of tax collections is due to their importance to businesses and individuals and their increasing size and visibility to all taxpayers. Both are included to gain a better understanding of how much each state collects in proportion to its population and its income. Tax collections as a percentage of personal income forms an effective rate that gives taxpayers a sense of how much of their income is devoted to property taxes, and the per capita figure lets them know how much in actual dollar terms they pay in property taxes compared to residents of other states.

While these measures are not ideal—having effective tax rates of personal and real property for both businesses and individuals would be preferable—they are the best measures available due to the significant data constraints posed by property tax collections. Since a high percentage of property taxes are levied on the local level, there are countless jurisdictions.

The sheer number of different localities makes data collection almost impossible. The few studies that tackle the subject use representative towns or cities instead of the entire state. Thus, the best source for data on property taxes is the Census Bureau, because it can compile the data and reconcile definitional problems.

States that maintain low effective rates and low collections per capita are more likely to promote growth than states with high rates and collections. Property Tax Collections Per Capita. Property tax collections per capita are calculated by dividing property taxes collected in each state obtained from the Census Bureau by population. Effective Property Tax Rate. This provides an effective property tax rate. States with the highest effective rates and therefore the worst scores are New Hampshire 5.

States that score well with low effective tax rates are Alabama 1. Capital Stock Tax Rate. Capital stock taxes sometimes called franchise taxes are levied on the wealth of a corporation, usually defined as net worth. They are often levied in addition to corporate income taxes, adding a duplicate layer of taxation and compliance for many corporations. Corporations that find themselves in financial trouble must use their limited cash flow to pay their capital stock tax.

In assessing capital stock taxes, the subindex accounts for three variables: the capital stock tax rate; the maximum payment; and whether any capital stock tax is imposed in addition to a corporate income tax, or whether the business is liable for the higher of the two. The capital stock tax subindex is 20 percent of the total rate subindex. This variable measures the rate of taxation as levied by the 16 states with a capital stock tax. Legislators have come to realize the damaging effects of capital stock taxes, and a handful of states are reducing or repealing them.

Kansas completed the phaseout of its tax in West Virginia and Rhode Island fully phased out their capital stock taxes as of January 1, , and Pennsylvania phased out its capital stock tax in The New York capital stock tax will phase out by Illinois will begin a phaseout in , completing the process in Connecticut will phase out its tax over five years starting in States with the highest capital stock tax rates include Connecticut 0.

Maximum Capital Stock Tax Payment. Eight states mitigate the negative economic impact of the capital stock tax by placing a cap on the maximum capital stock tax payment. These states are Alabama, Connecticut, Delaware, Georgia, Illinois, Nebraska, New York, and Oklahoma, and among states with a capital stock tax, they receive the highest score on this variable.

Some states mitigate the negative economic impact of the capital stock tax by allowing corporations to pay the higher of their capital stock tax or their corporate tax. These states Connecticut, Massachusetts, and New York are given credit for this provision. States that do not have a capital stock tax get the best scores in this subindex while the states that force companies to pay both score the worst.

This subindex is composed of dummy variables listing the different types of property taxes each state levies. Seven taxes are included and each is equally weighted. Connecticut, Maryland, and Kentucky receive the worst scores because they impose many of these taxes. Business Tangible Property Tax. This variable rewards states which remove, or substantially remove, business tangible personal property from their tax base. Taxes on tangible personal property, meaning property that can be touched or moved as opposed to real estate , are a source of tax complexity and nonneutrality, incentivizing firms to change their investment decisions and relocate to avoid the tax.

Seven states Delaware, Hawaii, Illinois, Iowa, New York, Ohio, and Pennsylvania exempt all tangible personal property from taxation, while another five states Minnesota, New Hampshire, New Jersey, North Dakota, and South Dakota exempt most such property from taxation except for select industries that are centrally assessed. Intangible Property Tax. This dummy variable gives low scores to those states that impose taxes on intangible personal property.

Intangible personal property includes stocks, bonds, and other intangibles such as trademarks. Inventory Tax. Inventory taxes are highly distortionary, because they force companies to make decisions about production that are not entirely based on economic principles but rather on how to pay the least amount of tax on goods produced. Inventory taxes also create strong incentives for companies to locate inventory in states where they can avoid these harmful taxes.

Fourteen states levy some form of inventory tax. Split Roll Taxation. In some states, different classes of property—like residential, commercial, industrial, and agricultural property—face distinct tax burdens, either because they are taxed at different rates or are exposed to different assessment ratios. When such distinctions exist, the state is said to have a split rather than unified property tax roll. The Index assesses whether states utilize split roll taxation, which tends to discriminate against business property, and what ratio exists between commercial and residential property taxation.

Property Tax Limitation Regimes. Most states limit the degree to which localities can raise property taxes, but these property tax limitation regimes vary dramatically. Broadly speaking, there are three types of property tax limitations. It often, but not always, resets upon sale or change of use, and sometimes resets when substantial improvements are made.

Rate limits, as the name implies, either cap the allowable rate or restrict the amount by which the rate can be raised in a given year. Finally, levy limits impose a restriction on the growth of total collections excluding those from new construction , implementing or necessitating rate reductions if revenues exceed the allowable growth rate. The Index penalizes states for imposing assessment limitations, which distort property taxation, leading to similar properties facing highly disparate effective rates of taxation and influencing decisions about property utilization.

It also rewards states for adopting either a rate or levy limit, or both. Four taxes levied on the transfer of assets are part of the property tax base. Thirty-five states and the District of Columbia levy taxes on the transfer of real estate, adding to the cost of purchasing real property and increasing the complexity of real estate transactions.

This tax is harmful to businesses that transfer real property often. Prior to , most states levied an estate tax that piggybacked on the federal system, because the federal tax code allowed individuals to take a dollar-for-dollar tax credit for state estate taxes paid.

In other words, states essentially received free tax collections from the estate tax, and individuals did not object because their total tax liability was unchanged. Consequently, over the past decade, some states enacted their own estate tax while others repealed their estate taxes. Some states have provisions reintroducing the estate tax if the federal dollar-for-dollar credit system is revived.

However, in late , Congress reenacted the estate tax for and but with higher exemptions and a lower rate than pre law and maintained the deduction for state estate taxes. The tax reform law of raised the federal exemption still further. Thirty-eight states receive a high score for either 1 remaining coupled to the federal credit and allowing their state estate tax to expire or 2 not enacting their own estate tax, including two which repealed their estate tax this year.

Twelve states have maintained an estate tax either by linking their tax to the pre-EGTRRA credit or by creating their own stand-alone system. These states score poorly. Each year, some businesses, especially those that have not spent a sufficient sum on estate tax planning and on large insurance policies, find themselves unable to pay their estate taxes, either federal or state.

Usually they are small- to medium-sized family-owned businesses where the death of the owner occasions a surprisingly large tax liability. Inheritance taxes are similar to estate taxes, but they are levied on the heir of an estate instead of on the estate itself. Six states have inheritance taxes and are punished in the Index , because the inheritance tax causes economic distortions. Maryland has both an estate tax and an inheritance tax, the only state to impose both now that New Jersey has completed the repeal of its estate tax.

Connecticut is the only state with a gift tax, and it scores poorly. Unemployment insurance UI is a social insurance program jointly operated by the federal and state governments. Taxes are paid by employers into the UI program to finance benefits for workers recently unemployed. One of the worst aspects of the UI tax system is that financially troubled businesses, for which layoffs may be a matter of survival, actually pay higher marginal rates as they are forced into higher tax rate schedules.

Unemployment insurance taxes comprise 9. Comparatively speaking, these states have rate structures with lower minimum and maximum rates and a wage base at the federal level. In addition, they have simpler experience formulas and charging methods, and they have not complicated their systems with benefit add-ons and surtaxes.

These states tend to have rate structures with high minimum and maximum rates and wage bases above the federal level. They also tend to feature more complicated experience formulas and charging methods, and have added benefits and surtaxes to their systems. UI tax rates in each state are based on a schedule of rates ranging from a minimum rate to a maximum rate.

Multiple rates and rate schedules can affect neutrality as states attempt to balance the dual UI objectives of spreading the cost of unemployment to all employers and ensuring high-turnover employers pay more. Overall, the states with the best score on this rate subindex are Nebraska, Maine, Florida, South Carolina, Mississippi, and Louisiana.

Generally, these states have low minimum and maximum tax rates on each schedule and a wage base at or near the federal level. The subindex gives equal weight to two factors: the actual rate schedules in effect in the most recent year, and the statutory rate schedules that can potentially be implemented at any time depending on the state of the economy and the UI fund.

Minimum Tax Rate. States with lower minimum rates score better. The minimum rates in effect in the most recent year range from zero percent in Hawaii, Iowa, Kansas, Missouri, and Nebraska to 2. Maximum Tax Rate. States with lower maximum rates score better. The maximum rates in effect in the most recent year range from 5. Taxable Wage Base. Due to the effect of business and seasonal cycles on UI funds, states will sometimes change UI tax rate schedules.

States receive the best score in this variable with a minimum tax rate of zero, which they implement when unemployment is low and the UI fund is flush. The minimum rate on the most favorable schedule ranges from zero in 20 states to 1.

The lowest maximum rate of 5. The state with the highest maximum tax rate and, thus, the worst maximum tax score, is Wisconsin Twelve states receive the best score on this variable with a minimum tax rate of zero percent. The state with the highest minimum tax rate and, thus, the worst minimum tax score, is Hawaii 2. Ten states receive the best score in this variable with a comparatively low maximum tax rate of 5. The state with the highest maximum tax rate and, thus, the worst maximum tax score, is Massachusetts The UI base subindex scores states on how they determine which businesses should pay the UI tax and how much, as well as other UI-related taxes for which businesses may also be liable.

In general, these states have relatively simple experience formulas, they exclude more factors from the charging method, and they enforce fewer surtaxes. In general, they have more complicated experience formulas, exclude fewer factors from the charging method, and have complicated their systems with add-ons and surtaxes. The three factors considered in this subindex are experience rating formulas 40 percent of the subindex score , charging methods 40 percent of the subindex score , and a host of smaller factors aggregated into one variable 20 percent of the subindex score.

Experience Rating Formula. There are four basic experience formulas: contribution, benefit, payroll, and state experience. In other words, the state experience is not tied to the experience of any one business; therefore, it is a more neutral factor. This subindex penalizes states that depend on the contribution, benefit, and payroll experience variables while rewarding states with the state experience variable.

Charging Methods and Benefits Excluded from Charging. When a former employee applies for unemployment benefits, the benefits paid to the employee must be charged to a previous employer. There are three basic charging methods:. None of these charging methods could be called neutral, but at the margin, charging the most recent or principal employer is the least neutral because the business faced with the necessity of laying off employees knows it will bear the full benefit charge.

As a result, the states that charge in proportion to base-period wages receive the best score. The states that charge the most recent or principal employer receive the worst score. The states that charge base-period employers in inverse chronological order receive a median score. Therefore, this subindex also accounts for six types of exclusions from benefit charges:. States are rewarded for each of these exclusions because they nudge a UI system toward neutrality.

For instance, if benefit charges were levied for employees who voluntarily quit, then industries with high turnover rates, such as retail, would be hit disproportionately harder. Most states charge the most recent or principal employer and forbid most benefit exclusions. Solvency Tax. Twenty-seven states have a solvency tax on the books, though they fall under different names, such as solvency adjustment tax Alaska , supplemental assessment tax Delaware , subsidiary tax New York , and fund balance factor Virginia.

These are levied on employers when the state desires to recover benefit costs above and beyond the UI tax collections based on the normal experience rating process. Ten states have these taxes on the books, though they fall under different names, such as shared cost assessment tax Alabama and social cost factor tax Washington.

Loan and Interest Repayment Surtaxes. Levied on employers when a loan is taken from the federal government or when bonds are sold to pay for benefit costs, these taxes are of two general types. The first is a tax to pay off the federal loan or bond issue. The second is a tax to pay the interest on the federal loan or bond issue. Eighteen states and the District of Columbia have these taxes on the books, though they fall under several names, such as advance interest tax and bond assessment tax Colorado and temporary emergency assessment tax Delaware.

Reserve Taxes. Reserve taxes are levied on employers, to be deposited in a reserve fund separate from the unemployment trust fund. Twenty-six states and the District of Columbia levy surtaxes on employers, usually to fund administration but sometimes for job training or special improvements in technology. Some of the names they go by are job training tax Arizona , reemployment service fund tax New York , wage security tax Oregon , and investment in South Dakota future fee South Dakota.

A handful of states—California, Hawaii, New Jersey, and New York—have established a temporary disability insurance TDI program that augments the UI program by extending benefits to those unable to work because of sickness or injury. Because the balance of the funds triggers various taxes, the TDIs are included as a negative factor in the calculation of this subindex. Voluntary Contributions. Twenty-five states allow businesses to make voluntary contributions to the unemployment trust fund.

In most cases, these contributions are rewarded with a lower rate schedule, often saving the business more money in taxes than was paid through the contribution. The Index rewards states that allow voluntary contributions because firms are able to pay when they can best afford to instead of when they are struggling. This provision helps to mitigate the nonneutralities of the UI tax. Time Period to Qualify for Experience Rating. Newly formed businesses, naturally, do not qualify for an experience rating because they have no significant employment history on which to base the rating.

From a neutrality perspective, however, this new employer rate is nonneutral in almost all cases since the rate is higher than the lowest rate schedule. The longer this rate is in effect, the worse the nonneutrality. As such, the Index rewards states with the minimum one year required to earn an experience rating and penalizes states that require the full three years.

Agostini, Claudio and Soraphol Tulayasathien. Anderson, Patrick. Bartik, Timothy J. Kalamazoo, MI: W. Upjohn Institute for Employment Research, Besley, Timothy J. Bishop-Henchman, Joseph. Bishop-Henchman, Joseph and Jason Sapia. Bosch, Nuria and Albert Sole-Olle.

Brueckner, Jan and Luz A. Brunori, David. Chamberlain, Andrew and Patrick Fleenor. Chorvat, Terrence R. Due, John F. Fetting, David. Fisher, Peter. Washington, D. Second Edition Washington, D. Fleenor, Patrick. Fleenor, Patrick and J. Scott Moody. Fox, William F. Gentry, William H. Glenn Hubbard. Giroud, Xavier, and Joshua Rauh. Goolsbee, Austan Goolsbee, Austan and Edward L. Gupta, Sanjya and Mary Ann Hofmann.

Harden, J. William and Hoyt, William H. Haughton, Jonathan and Vadym Slobodyanyuk. Helms, L. Hodge, Scott A. Kwall, Jeffrey K. Ladd, Helen F. Mark, Stephen T. Mc Quire, and Leslie E. McQuire, Therese J. Mikesell, John L. Miles, Marc A. Moody, J. Moon, Matt. Newman, Robert J. Newman, Robert and Dennis Sullivan. Oakland, William H. Papke, James A. Peters, Alan and Peter Fisher. Poletti, Therese. Pomp, Richard. Plaut, Thomas R. Mutual Funds. Babar Zaidi. Font Size Abc Small.

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