Small business owners who just filed their taxes are heaving a sigh of relief that the season is over and their returns are in. That leaves time for the bigger questions, of course: What's next year going to be like? Am I in a good place? How can I pay lower taxes in the future?
To answer those questions, the Small Business & Entrepreneurship Council (SBE) released its Business Tax Index on April 16, just one day ahead of the 2011 federal tax-filing deadline. The SBE's index ranks all 50 U.S. states as well as Washington from best to worst in terms of each tax system's cost on entrepreneurship and small business. The index pulls together 18 different tax measures, combining them into a tax score that allows for a state-by-state comparison.
"All taxes matter, whether imposed at the federal, state or local level of government," writes chief economist Raymond Keating in his introduction to the SBE Business Tax Index 2012 report. "They matter to consumers, entrepreneurs, investors and businesses. They matter in terms of a state's competitiveness. And they matter when it comes to economic growth and job creation."
The following 10 states, in reverse order, ranked lowest on SBE's list of 18 taxes, including personal income, individual capital gains tax rate, corporate income, corporate capital gains, added income tax on S-corporations, property taxes, unemployment taxes and sales taxes. (Keating notes that the personal income tax influences business "far more than generally assumed" because more than 92% of businesses file taxes as individuals, such as sole proprietorships, partnerships and S-corps, and therefore pay personal income taxes rather than corporate income taxes.)
Tax rates of all 50 states and the District of Columbia are ranked from 1 to 51, 1 being the lowest, or best, rates.
"This annual report details just how borderline impossible it is to start a new business in our state," complained entrepreneur Kenneth Wisnefski after reading the SBE report. And yes, Wisnefski's home state of New Jersey is on the list of 10 worst states for small business taxes.
Read the Top 10 Worst Tax States for Retirees at AdvisorOne.
10. CONNECTICUT
State Tax Index Overall Score: 49.55
Top Personal Income Tax Rate: 6.7% (34th)
Top Corporate Capital Gains Tax Rate: 9.0% (44th, tied with New Jersey and Rhode Island)
Top Corporate Income Tax Rate: 9% (43rd, tied with New Jersey and Rhode Island)
State and Local Property Taxes as a Share of Personal Income: 4.61% (46th)
9. HAWAII
State Tax Index Overall Score: 49.58
Top Personal Income Tax Rate: 11% (51st)
Top Corporate Capital Gains Tax Rate: 4% (7th)
Top Corporate Income Tax Rate: 6.4% (21st)
State and Local Property Taxes as a Share of Personal Income: 2.4% (10th)
8. VERMONT
State Tax Index Overall Score: 52.05
Top Personal Income Tax Rate: 8.95% (46th)
Top Corporate Capital Gains Tax Rate: 8.5% (38th, tied with Indiana and New Hampshire)
Top Corporate Income Tax Rate: 8.5% (37th, tied with Indiana and New Hampshire)
State and Local Property Taxes as a Share of Personal Income: 5.29% (49th)
7. CALIFORNIA
State Tax Index Overall Score: 52.22
Top Personal Income Tax Rate: 10.3% (50th)
Top Corporate Capital Gains Tax Rate: 8.84% (42nd)
Top Corporate Income Tax Rate: 8.84% (41st)
State and Local Property Taxes as a Share of Personal Income: 3.53% (32nd)
6. MAINE
State Tax Index Overall Score: 52.47
Top Personal Income Tax Rate: 8.5% (44th)
