Montana ranks No. 8 for its tax climate for business – dropping a notch from seventh place in 2011 – according to a 2012 report released Wednesday by an organization that monitors fiscal policies.
Wyoming ranked No. 1, according to the eighth edition of the State Business Tax Climate Index put out by the Washington, D.C.-based Tax Foundation.
Top-ranking states do not have one or more of the major taxes – corporate tax, individual income tax or sales tax, the study’s author said.
“The lesson is simple, the state that raises sufficient revenue without one of the major taxes, will, all things being equal, have an advantage over those states that levy every tax in the state tax collector’s arsenal,” economist Mark Robyn wrote.
Florida and Texas rank second and third respectively and New Jersey finished last.
Montana’s neighboring states of Idaho finished 21st and North Dakota ranked 29th.
The index uses dozens of state tax provisions, creating a score that compares states.
Tax Foundation officials said each state’s ranking is relative to the actual tax policies in place nationwide, not a measurement against a theoretical “perfect” system.
The Index enables business leaders, government policymakers, and taxpayers to gauge how their states’ tax systems compare. While some similar studies focus on the total amount residents pay in taxes each year, the Index focuses on how the elements of a state tax system enhance or harm the competitiveness of a state’s business environment.
“Even in our global economy, a state’s stiffest and most direct competition often comes from other states,” said Robyn. “State lawmakers need to be aware of how their states’ business climates match up to their immediate neighbors and to other states in their region.”
The 10 best states in this year’s 2012 Index are Wyoming (1), South Dakota (2), Nevada (3), Alaska (4), Florida (5), New Hampshire (6), Washington (7), Montana (8), Texas (9), and Utah (10). Many of these states do not have one or more of the major taxes, and thus do not have the associated complexity and distortions.
The 10 lowest ranked, or worst, states in the 2012 Index are Iowa (41), Maryland (42), Wisconsin (43), North Carolina (44), Minnesota (45), Rhode Island (46), Vermont (47), California (48), New York (49), and New Jersey (50). While New Jersey remained steady compared with 2011, Rhode Island improved by implementing a modest income tax reform. The states in the bottom ten generally have complex, non-neutral taxes with comparatively high rates, the Tax Foundation said.
Illinois moved most dramatically in its Index rank over the past year, falling 12 places after a significant income and corporate tax increase. Other states seeing a decline in their ranking include Vermont, which fell four places, while Massachusetts and North Dakota both moved four places up the chart.
Robyn said Montana fell in rankings not so much for what it did, but for what it didn’t do.
“It’s like falling behind by standing still,” he told Montana Watchdog. “Some of the states did better.”
Robyn said some of the states are very close in their rankings and a fairly small change in policy can change the score.
“Other states are making changes and because of that Montana did slightly worse,” he said.
For instance, Montana and Washington basically flipped in 2012, according to the chart. Washington moved up a space to seventh in 2012 and Montana moved down to eighth. The same happened with Nevada and Alaska in 2012. Nevada moved up to third and Alaska moved down to fourth. The other rankings remained the same from the previous year.
Robyn said Montana’s reduction in the business equipment tax and the cuts to workers’ compensation rates, accomplished in the 2011 legislative session, did not factor into the rankings.
According to the study, Montana ranked 15th for corporate taxes, 20th for individual income taxes, third for sales tax, 20th for unemployment insurance and eighth for property tax.
Robyn said Montana has a personal income tax of 6.9 percent that kicks in at $15,000 or more. He said it would work to the state’s advantage to have a flatter tax structure.
He said Montana allows for businesses to carry forward losses for up to seven years while many states now allow 20. “Montana gets dinged (in the rankings) for that,” he said.
He also said Montana has tax break credits to bring in new corporations but bad tax policy elsewhere. “Every time you do that, you are lowering taxes for that person,” he said adding that taxes are then raised on someone else to make up that difference.
“Get rid of “swiss cheese tax codes,” he said, adding the state should reduce tax rates and keep revenues constant.
Jon Bennion, government relations director with the Montana Chamber of Commerce, said the state has made progress, but needs to do more.
“Even with the drop from seventh to eighth, Montana has earned this competitive ranking over the last two decades by lowering its individual income tax rates and reducing business equipment taxes,” he said. “We need to continue to look for ways to make Montana the most competitive place to set up a business in order to bring more high-wage jobs to our state.”