When businesses are planning to locate, expand or relocate, their decisions may be affected by business tax policies. Business taxes affect decisions regarding the location of new facilities, wages, and employment, transparency of tax systems, and the long-term health of a state’s economy. When taxes are high, businesses pass them along to employees, consumers, and shareholders in the form of reduced wages and lower share values. When taxes are low, businesses are more likely to invest in a state and experience economic growth.
States that are competitive in terms of business tax climate are those that have the least amount of taxes compared to their neighbors. Business tax rates are updated annually to reflect the Producers Price Index (PPI) for the previous year. However, there are many other factors that affect business tax climate. In some cases, a state may not have an effective tax structure at all. The best place to start is by consulting with an expert in business tax policy.
While the competitive nature of the modern market makes business taxation a very important issue, many businesses still choose to locate in a location that offers them the best tax system. For example, Connecticut’s 5.12 score for corporate income taxes is more advantageous than its 4.76 score for sales tax. The Index is a measure of the business tax climate in each state as of the start of the standard state fiscal year, July 1, 2020. In most cases, this date represents fiscal year 2021.
While business tax policy is a highly contested issue, there are some general rules that should be followed to avoid legal issues. First, states should follow the rules that govern corporate taxes. Depending on the industry, states may levy their own business tax laws. As a rule of thumb, the better the business tax climate, the lower the tax rates. This can be a huge advantage for entrepreneurs, but companies must understand the laws of their local tax jurisdictions.
Moreover, states with no exemptions for businesses are likely to be more burdensome. States that impose no business tax on inputs like payroll and profits are likely to have the worst business tax rates. Some of these states have no exclusions for these inputs and end up with tax pyramiding. A business tax in a state with a high combined state and local rate is an unnecessary burden for many businesses. The bottom line is to choose a state that is neutral when it comes to taxes.
Sales tax on business inputs is a major concern, as this tax is built into the price of goods and services. This leads to a “tax pyramid” effect, where some industries pay higher taxes than others. It also causes distortions in economic activity. In the worst case scenario, businesses can’t keep up with the costs of taxing their inputs. This would result in less business, which in turn would cost jobs. So, in addition to imposing a tax on inputs, it’s also important to understand that businesses cannot escape taxes.
