North Carolina has a fixed corporate tax rate of 2.5%, the lowest in the United States. According to the Tax Foundation's analysis, many of the top 10 states with the lowest taxes share the absence of a major tax. Wyoming, Nevada (which has taxes on gross income) and South Dakota have no corporate or individual income taxes. Alaska has no income or individual sales taxes at the state level, and Florida does not have income taxes.
Oregon, New Hampshire and Montana do not have sales taxes. This doesn't mean that a state can't be in the top 10 and, at the same time, collect all major taxes. Indiana and Utah, for example, collect all major types of taxes but with low rates overall. California imposes higher-than-average state income taxes on businesses and individuals.
However, this isn't the worst part. California is one of the few states that imposes commercial and personal taxes on small business owners who establish their businesses as transfer entities, such as S corporations or limited liability companies (LLCs). Nevada, which taxes wage income (but not non-earned income) at a low rate under a non-UI payroll tax, also performs well in this component of the index. The rate is applied to a taxable wage base (a predetermined fraction of an employee's salary) to determine the tax liability of the UI.
The negative impact of sales taxes is well documented in economic literature and anecdotal evidence. We do this not only because the Tax Foundation has experience in taxes but because each component of the Index is subject to immediate change by state legislators. The taxes that companies pay should concern everyone because, ultimately, they are paid by individuals through lower salaries, higher prices and a decrease in shareholder value. Since property taxes can be a big burden on businesses, they can have a significant effect on location decisions.
Based on a substantial review of the literature on business climate and taxes, Wasylenko (199) concludes that taxes do not seem to have a substantial effect on economic activity between states. For example, Newman (198) found that differences in state corporate income taxes were an important factor influencing the movement of industry to the southern states. Louisiana has some of the lowest property tax rates as a percentage of earned income because it offers an exemption for family homes. Apportionment is the determination of the percentage of a company's profits subject to corporate income taxes or other business taxes in a given jurisdiction.
The company's revenues then pass to the business owners who must pay state personal income tax for it. When properly structured, property taxes exceed most other taxes in terms of complying with the benefit principle and can be quite economically efficient. They found that higher rates of two business taxes - sales tax and personal property tax - are associated with lower employment growth. New Hampshire also scores well because while it collects a tax on individual income in the form of interest and dividends, it does not tax wages or salaries.
The tax base is the total amount of income, property, assets, consumptions, transactions or other economic activities subject to tax by a tax authority. A well-structured sales tax includes all goods for end users in its tax base to keep its base broad, its rates low and avoid distortions in the market.
