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Best, worst states for business?

By Kay Bell · Bankrate.com
Thursday, October 28, 2010
Posted: 12 pm ET

As the economy slowly sputters back to life, states with business-friendly tax systems will be the most successful in attracting new companies.

In 2011, the state that is most likely to attract new business is South Dakota.

The Mount Rushmore State tops the Tax Foundation's annual State Business Tax Climate Index.

The rest of the 10 states with tax systems that businesses find appealing are Alaska, Wyoming, Nevada, Florida, Montana, New Hampshire, Delaware, Utah and Indiana.

The rankings are important because, despite all the complaints (and even a new television comedy this year) about overseas outsourcing, Department of Labor data show most mass job relocations are from one state to another.

"While most of the tax debate this year has focused around state budget problems and the expiration or extension of the 2001-2003 Bush tax cuts, it is important to remember that states' stiffest competition often comes from other states," says Kail M. Padgitt, author of the Tax Foundation's latest report .

So state lawmakers need to know how their states' business tax climates match up to their immediate neighbors and to other states within their regions.

And although many nontax factors also affect a state's overall business climate, taxes remain a key consideration of companies looking to expand or relocate.

"The ideal tax system, whether at the local, state or federal level, is simple, transparent, stable, neutral to business activity, and pro-growth," says Padgitt. In other words, companies prefer low, flat tax rates on the broadest range of taxpayers and a system in which taxpayers are treated the same. The same probably could be said for most individual taxpayers, too, but that's for another survey and another blog post.

"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," says Padgitt.

To that end, the State Business Tax Climate Index rewards those states that apply these principles in five important areas of taxation: major business taxes, individual income taxes, sales taxes, unemployment insurance taxes and property taxes.

The Tax Foundation analysis found that states without sales or income taxes fare better in its ranking. Nevada, South Dakota and Wyoming, for example, all have no personal or corporate income tax. Alaska has no personal income tax or state sales tax. Florida has no individual income tax. Delaware, New Hampshire and Montana have no sales tax.

And which states do businesses find unappealing, at least from a tax standpoint?

The 10 states with the worst business climates, ranked 41st hrough 50th, are North Carolina, Rhode Island, Minnesota, Maryland, Iowa, Ohio, Connecticut, New Jersey, California and New York.

These bottom 10 states, says the Tax Foundation, suffer from the same afflictions: complex, non-neutral taxes with comparatively high tax rates.

New York ranked worst because of its third-worst individual income tax, ninth-worst sales tax and worst property tax. Rhode Island has improved from 44th to 42nd, but still has the worst unemployment tax system and third-worst property tax system. Connecticut fell into the bottom 10 this year primarily because state lawmakers created a new "millionaire's tax" on the state's highest earners.

The one bit of good news from the bottom 10 applies to New Jersey.

The Garden State broke a three-year streak of having the worst business tax climate in the country, improving to 48th in this year's ranking.

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