In this article, we will take a look at the 15 states with the lowest business taxes.
Business taxes refer to the various levies imposed by the government on companies and organizations. These taxes are used to finance public services and infrastructure and are usually based on a company’s revenue, profits, or the number of employees. The types of business taxes can vary depending on the location of the company, but some common examples include the Corporate Income Tax, which is imposed on the profits generated by corporations; the Value-Added Tax (VAT), which is levied on the value added to goods and services during production and distribution; the Payroll Tax, which is charged on the salaries and wages paid to employees; and the Property Tax, which is imposed on the value of the personal property or real estate. It is important for businesses to understand their tax obligations and plan accordingly to avoid penalties, fines, and legal trouble. Tax professionals, such as accountants or attorneys, can provide assistance in ensuring compliance with all relevant tax laws and regulations.
Corporations may be significantly impacted by taxes, which may also have an impact on their financial performance and competitiveness. Companies such as Walmart Inc. (NYSE:WMT), Amazon.com, Inc. (NASDAQ:AMZN), and Target Corporation (NYSE:TGT), which employ a large number of workers, have faced increased costs due to high payroll taxes in certain states. Similarly, companies such as Tesla, Inc. (NASDAQ:TSLA) and General Motors Company (NYSE:GM), which operate large facilities and require a significant amount of land, have been affected by high property taxes in certain regions.
photo by scott graham on Unsplash
Our Methodology
We have referred to the report issued by the Washington DC-based Tax Foundation to determine the rankings. The entity, established in 1937, issues a State Business Tax Climate Index every year. The report incorporates the individual income tax, sales tax, corporate tax, property tax, and unemployment tax to evaluate each state’s business tax environment and assign a score ranging from 0 (least favorable) to 10 (most favorable). The five components are not given equal weight as in other indices; instead, the weight assigned to each component is based on the degree of deviation of the scores of the 50 states from the average score.
15 States with the Lowest Business Taxes
15. Idaho
2023 State Business Tax Climate Index Score: 5.51
Idaho imposes a state sales tax rate of 6.00%, and local jurisdictions may impose an additional 3.00% sales tax. This results in an average combined state and a local sales tax rate of 6.02%. The company’s corporate income tax rate also stands at 6%. All individuals who are required to file a federal income tax return must also file a state tax return. If a part-year resident has a gross income of over $2,500 from Idaho sources, or if a nonresident has more than $2,500 in Idaho income, they must also file an Idaho tax return. Property taxes in Idaho are determined by the county government, while capital gains are treated as regular income and taxed as such.
14. Tennessee
2023 State Business Tax Climate Index Score: 5.51
In Tennessee, there is a 6.50% corporate income tax as well as a gross receipts tax. The state sales tax rate stands at 7.00%, and local jurisdictions may add up to a 2.75% sales tax. On average, the combined state and local sales tax rate amounts to 9.55%. Starting on January 1, 2023, eligible farmers, harvesters, and nursery operators will be able to purchase building materials, fencing materials, and most other tangible personal property used in agriculture tax-free, as they will be exempt from sales and use tax. Sales tax still applies to vehicles, household appliances, and gasoline or diesel fuel used in vehicles that are driven on public roads.
13. Texas
2023 State Business Tax Climate Index Score: 5.51
In Texas, a 6.25% sales and use tax is applied to most goods and services that are sold, leased, or rented. Local jurisdictions, such as cities, counties, and transit authorities, may also impose an additional 2% sales and use tax, bringing the maximum combined rate to 8.25%. Texas does not have a corporate income tax, but it does have a gross receipts tax. The gross receipts tax is based on the location of the business within incorporated cities and towns, with the rate being determined by the population of the area.
12. Michigan
2023 State Business Tax Climate Index Score: 5.57
In Michigan, individuals are taxed at a flat rate of 4.25% of their income, and companies are taxed at a rate of 6.00% of their corporate income. The state sales tax rate is 6.00%, with no additional local sales taxes imposed. Michigan is known for having high property taxes compared to the rest of the country, as evidenced by its high average effective property tax rate. This rate, which represents the total amount of property taxes paid as a proportion of a home’s market value, is 1.32% for residents in Michigan.
11. Missouri
2023 State Business Tax Climate Index Score: 5.59
Missouri has a flat corporate income tax rate of 4%, making it one of the 11 states that have a corporate tax rate of 5% or less. The state has a multi-tier income tax rate that starts at 1.5% and ends at 5.4%. Some municipalities charge income tax at the local level as well. The state sales tax stands at 4.225%, which can be increased by as much as 5.763% by local authorities. The average combined local sales tax stands at 8.29% in Missouri. The individual income tax collection per capita through state and local income tax stands at $1,132.
10. North Carolina
2023 State Business Tax Climate Index Score: 5.60
North Carolina has a flat corporate income tax rate of 2.5%. This is the lowest corporate tax rate charged by a state across the US. The state is also in the process of phasing out corporate tax from 2025 onwards and could achieve this target by 2030 under the leadership of the Republican party. The party was initially responsible for executing the initial cut in corporate income tax in 2013.
9. Indiana
2023 State Business Tax Climate Index Score: 5.63
Indiana has a flat single-bracket corporate income tax rate of 4.9%. This means that all corporations, regardless of their income, pay the same rate. Additionally, Indiana offers a corporate income tax credit for businesses located in enterprise zones or making investments in certain qualified properties. There are also exemptions and deductions available for certain types of businesses and activities. The state has been able to bring down its corporate tax rate from 8.5% in June 2012 to the current rate of 4.9% since July 2021.
8. Utah
2023 State Business Tax Climate Index Score: 5.64
Utah has a flat corporate tax rate of 4.85% under a single bracket. The state saw a ten bps decline in corporate income tax in 2022 to achieve the 4.85% level. The corporate income tax is the same as the individual income tax rate. The state also imposes a 6.1% sales tax that can be further increased by as much as 2.1% by local municipalities and counties.
7. Nevada
2023 State Business Tax Climate Index Score: 5.96
Nevada doesn’t have a corporate income tax, but there is a gross receipts tax in place. The state has a sales tax rate of 6.85%, and local sales taxes can reach up to 1.53%, resulting in an average combined state and a local sales tax rate of 8.23%. Furthermore, there is no individual income tax. Despite the absence of state corporate income taxes in Nevada, certain state business taxes may still apply. The Modified Business Tax (MBT) is a type of payroll tax calculated based on the total wages paid by a business in a quarter. Starting July 1, 2023, the modified business tax (MBT) rate will change to 1.17% for general business and 1.554% for financial institutions and mining.
6. New Hampshire
2023 State Business Tax Climate Index Score: 5.96
Individuals in New Hampshire are taxed at a uniform rate of 5% on their interest and dividend income. It is noteworthy that New Hampshire does not have a state sales tax, and local sales taxes are also not in effect. New Hampshire’s Business Profits Tax is based on the income generated from businesses operating within the state. As of 2023, the rate for the Business Profits Tax is 7.6% and applies to gross income over $92,000. From 2024, the tax rate will decrease to 7.5%. Furthermore, the Business Enterprise Tax in New Hampshire is based on either the “enterprise value tax base,” which represents the sum of all compensation and interest payments made by a business, or on the business’s gross receipts. The tax rate is set at 0.55%. For a business to be subject to the Business Enterprise Tax, either its gross receipts or the enterprise value tax base must surpass $250,000 as of 2023. This threshold is adjusted every two years to account for inflation.
Companies such as Walmart Inc. (NYSE:WMT), Amazon.com, Inc. (NASDAQ:AMZN), and Tesla, Inc. (NASDAQ:TSLA) are amongst some of the corporations impacted significantly by tax changes across states.
5. Montana
2023 State Business Tax Climate Index Score: 6.08
In Montana, individuals are subject to a graduated income tax with rates from 1% to 6.75%. The corporate income tax rate is 6.75%. Montana does not impose a state sales tax, and there are no local sales taxes. Starting in 2024, the individual income tax in Montana will have only two rates: 4.7% (applied to taxable income up to $20,500 for single filers and $41,000 for joint filers) and 6.5% (applied to taxable income above $20,500 for single filers and $41,000 for joint filers).
4. Florida
2023 State Business Tax Climate Index Score: 6.85
Florida has a single-bracket corporate income tax rate of 5.5%. The state lowered its corporate tax rate from 5.5% to 4.458% from the start of 2019 till the end of 2020 and further slashed it to 3.535% during 2021 before bringing it back to 5.5% at the start of 2022. The cut in corporate income tax was in line with numerous other states. The initial tax cut was made on the back of roaring tax collection during a booming economic phase. Meanwhile, the second corporate tax cut came during the COVID-19 pandemic to give relief to corporations.
3. Alaska
2023 State Business Tax Climate Index Score: 7.23
In Alaska, there is no individual income tax, but the state imposes a tax on business income through a progressive corporate tax system, with tax rates that currently range from 0% to 9.4%. The first $25,000 of taxable income is taxed at 0%, and the tax rate increases gradually until reaching 9.4% for taxable income portions of $222,000 or more. Although the state does not have a state sales tax, there is a maximum local sales tax rate of 7.5%, and the average combined rate of state and local sales tax is 1.76%.
2. South Dakota
2023 State Business Tax Climate Index Score: 7.49
South Dakota does not impose any corporate tax or any gross receipt tax. Along with Wyoming, South Dakota has been able to phase out corporate taxes. It is one of those states that does not charge any personal income tax as well. The state has a sales tax of 4.5% that can be increased by as much as 4.5% further by local authorities. The average combined state and local sales tax stands at 6.4%. The state charges a 30-cent tax per gallon of gasoline and collects $1,720 per capita through the collection of state and local general sales tax.
1. Wyoming
2023 State Business Tax Climate Index Score: 7.76
Wyoming does not charge any corporate tax nor any gross receipts tax. The state imposes a sales tax of 4% that can be further increased by as much as 2% only by local authorities. The state does not levy an individual income tax. The Cowboy State generates most of its tax revenue by imposing heavy property taxes and taxing businesses that are involved in the extraction of natural resources like coal. Wyoming is one of the states with the lowest taxes across the US, and thus it results in the lowest burden of per capita personal taxes.
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Disclosure: None. 15 States with the Lowest Business Taxes is originally published on Insider Monkey.
