State Tax Attractiveness Analysis

This report provides a comprehensive summary on sales, income, and corporation taxes in the 50 states, as well as tax-free zones (enterprise zones), with a special focus on the states of California, New Jersey, New York, Texas, Massachusetts, and Washington. This report intends to educate readers on tax rates in different states.

SALES TAX

Overview

Sales tax is defined as the tax levied on the sale of goods and services, collected by the retailer and sent to the government.[1] 45 states and the District of Columbia collect sales taxes, and 38 states also have local sales taxes, which may rival or exceed state rates.

Combined Sales Tax Rates

The five states with the highest average combined state and local sales tax rates are Louisiana (10.02 percent), Tennessee (9.46 percent), Arkansas (9.41 percent), Washington (9.18 percent), and Alabama (9.10 percent).

The five states with the lowest non-zero average combined sales tax rates are Alaska (1.76 percent), Hawaii (4.35 percent), Wisconsin (5.42 percent), Wyoming (5.46 percent), and Maine (5.5 percent).

The only five states that do not have state sales taxes are Alaska, Delaware, Montana, New Hampshire, and Oregon. Of these, only Alaska and Montana allow localities to charge local sales taxes.

State Tax Rates

The five states with the highest state-level tax rates are California (7.25 percent), Indiana (7 percent), Mississippi (7 percent), Rhode Island (7 percent), and Tennessee (7 percent).

The six states with the lowest non-zero state-level tax rates are Colorado (2.9 percent), Alabama (4 percent), Georgia (4 percent), Hawaii (4 percent), New York (4 percent), and Wyoming (4 percent).

Local Tax Rates

The five states with the highest average local sales tax rates are Alabama (5.10 percent), Louisiana (5.02 percent), Colorado (4.62 percent), New York (4.49 percent), and Oklahoma (4.41 percent).

States that do not have local sales tax rates include Connecticut, District of Columbia, Hawaii, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, and Rhode Island.[2]

For a comprehensive list of states, state tax rates, average local tax rate, combined tax rate, and ranks, please visit https://taxfoundation.org/state-and-local-sales-tax-rates-2018.

Tax-Free Zones[3]

In addition to sales taxes, some areas of the United States are designated as Tax-Free Zones or Enterprise Zones, where residents or companies are exempt from certain or all forms of taxes (including sales taxes), which affects their overall tax rate. Typically, the government designates areas as Enterprise Zones to stimulate business growth in depressed areas by providing tax subsidies. The following are some examples of Tax-Free Zones and Enterprise Zones:

Salem County, New Jersey

In Salem County, New Jersey, the state sales tax of 6.625 percent is reduced to 3.3125 percent for sales excluding alcoholic beverages, cigarettes, tickets, hotel fares, cars, restaurant food, maintenance services, and telephone sales. This policy was instated to help Salem County retailers compete with neighboring Delaware, which does not have a state sales tax.

Rhode Island Enterprise Zones[4]

In certain areas of Rhode Island, businesses receive a $50,000 deduction on state corporate income tax, which is reduced to $25,000 in the fourth and fifth years of business operation. In addition, Rhode Island also has Tax Free Zones in art districts, which are intended to promote the growth of artistic communities. In these zones, artists are exempt from sales taxes.

Alabama Enterprise Zones[5]

In certain areas of Alabama, there are sales and use tax exemptions on the purchase of materials used in construction and improvement of buildings.

Colorado Enterprise Zones[6]

In certain areas of Colorado, there are sales and use tax exemptions on equipment used in manufacturing or mining.

Arkansas[7]

The entire state of Arkansas has been declared an enterprise zone. In Arkansas, there are sales tax exemptions for machinery, equipment, and building materials, and there is a property tax exemption for all finished goods and raw materials awaiting shipment.

New York Tax-Free Weeks

Since 1996, New York has conducted five tax-free weeks, during which most clothing and footwear under $500 have been exempt from the 8.25% state sales tax, as well as local sales taxes. During the first tax-free week in January 1996, businesses experienced a 73 percent increase in sales as a result of the tax exemption.

PERSONAL INCOME TAX

Overview[8]

Personal Income Tax is defined as tax levied to individuals depending on their taxable income or profits. Income taxes are a major source of state government revenue, accounting for 37 percent of state tax collections. 41 states tax wage and salary income, while 2 states (New Hampshire and Tennessee) tax dividend and interest income. Seven states do not have a personal income tax.

The five states with the highest personal income tax rates are California (13.30 percent), Hawaii (11.00 percent), Oregon (9.90 percent), Minnesota (9.85 percent), and Iowa (8.98 percent).

The five states with the lowest non-zero personal income tax rates are North Dakota (2.90 percent), Tennessee (3.00 percent), Pennsylvania (3.07 percent), Indiana (3.23 percent), and Arizona (4.54 percent).

The only seven states that do not have personal income taxes are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.

For a comprehensive list of state personal income tax rates for single filers and married filers, please visit https://taxfoundation.org/state-individual-income-tax-rates-brackets-2018/

CORPORATION INCOME TAX

Overview[9]

Corporate income tax is defined as taxes levied on the profits made by a corporation. Corporate taxes are levied in 44 states, but account for only 5 percent of state tax collections and 2.6 percent of state general revenue.

The five states with the highest corporate tax rates are Iowa (12 percent), Pennsylvania (9.99 percent), Minnesota (9.8 percent), Illinois (9.5 percent), Alaska (9.4 percent), and New Jersey (9 percent).

The four states with the lowest non-zero corporate tax rates are North Carolina (3 percent), North Dakota (4.31 percent), Colorado (4.63 percent), and Arizona (4.9 percent).

The six states that do not have corporate taxes are Nevada, Ohio, Texas, Washington, South Dakota, and Wyoming. That said, Nevada, Ohio, Texas, and Washington also impose gross receipts taxes, which are taxes on the gross revenue of a company (similar to a sales tax but imposed on the company). Delaware and Virginia also impose gross receipts taxes.

Summary of Tax Rates in Certain States

California[10]

Ranking (out of 50)
Top individual income tax rate 13.3% 1
Number of brackets for individual income tax 10
Top corporate income tax rate 8.84% 8
Number of brackets for corporate income tax 1
State sales tax rate 7.25% 1
Average local sales tax rate 1.29%
Maximum local sales tax rate 2.50%
Combined state and average local sales tax rate 8.54% 9

With the highest individual income tax rate and the highest state sales tax rate in the country, as well as a high corporate income tax rate and a high combined state and average local sales tax rate, California’s tax attractiveness is very low.

New Jersey[11]

Ranking (out of 50)
Top individual income tax rate 8.97% 6
Number of brackets for individual income tax 6
Top corporate income tax rate 9.00% 6
Number of brackets for corporate income tax 1
State sales tax rate 6.63% 8
Average local sales tax rate -0.03%
Maximum local sales tax rate 3.31%
Combined state and average local sales tax rate 6.60% 30

New Jersey has high individual income, corporate income, and state sales tax rates. However, New Jersey derives its negative average local sales tax rate figure from enterprise zones, where subsidies allow businesses to be tax-exempt from state and local sales tax rates. Altogether, New Jersey’s tax attractiveness is low.

New York[12]

Ranking (out of 50)
Top individual income tax rate 8.82% 8
Number of brackets for individual income tax 8
Top corporate income tax rate 6.50% 24
Number of brackets for corporate income tax 1
State sales tax rate 4.00% 40
Average local sales tax rate 4.49%
Maximum local sales tax rate 4.875%
Combined state and average local sales tax rate 8.49% 10

New York has a high individual income tax rate, but low corporate income and state sales tax rates. High local sales tax rates make the combined state and local sales tax rate high in certain areas of New York, however. Altogether, New York’s tax attractiveness is moderate.

Texas[13]

Ranking (out of 50)
Top individual income tax rate 0.00% 50
Number of brackets for individual income tax 0
Top corporate income tax rate 0.00% 50
Number of brackets for corporate income tax 0
State sales tax rate 6.25% 13
Average local sales tax rate 1.92%
Maximum local sales tax rate 2.00%
Combined state and average local sales tax rate 8.17% 12

With no individual or corporate income tax rates, and a moderate combined state and average local sales tax rate, Texas’s tax attractiveness is very high.

Massachusetts[14]

Ranking (out of 50)
Top individual income tax rate 5.10% 29
Number of brackets for individual income tax 1
Top corporate income tax rate 8.00% 15
Number of brackets for corporate income tax 1
State sales tax rate 6.25% 13
Average local sales tax rate 0.00%
Maximum local sales tax rate 0.00%
Combined state and average local sales tax rate 6.25% 35

Massachusetts has a low individual income tax rate and a moderately high corporate income tax rate. Massachusetts’s lack of local sales taxes makes up for its moderately high state sales tax rate, making the combined state and average local sales tax rate very low. Altogether, Massachusetts’s tax attractiveness is high.

Washington[15]

Ranking (out of 50)
Top individual income tax rate 0.00% 50
Number of brackets for individual income tax 0
Top corporate income tax rate 0.00% 50
Number of brackets for corporate income tax 0
State sales tax rate 6.50% 9
Average local sales tax rate 2.68%
Maximum local sales tax rate 3.90%
Combined state and average local sales tax rate 9.18% 4

Washington has no individual or corporate income taxes and a high combined state and average local sales tax rate. Altogether, Washington’s tax attractiveness is very high.

[1] https://www.investopedia.com/terms/s/salestax.asp

[2] https://taxfoundation.org/state-and-local-sales-tax-rates-2018

[3] http://www.uvm.edu/~vlrs/doc/tax_incentives.htm

[4] http://www.riedc.com/growth/zones/entzoneframe.html

[5] www.ado.state.al.us/backa.html

[6] www.state.co.us/gov_dir/revenue_dir/fyi/html/gener106.html

[7] www.aedc.state.ar.us/climate/exemptions.html

[8] https://taxfoundation.org/state-individual-income-tax-rates-brackets-2018/

[9] https://taxfoundation.org/state-corporate-income-tax-rates-brackets-2018/

[10] https://www.ftb.ca.gov/forms/2017-California-Tax-Rates-and-Exemptions.shtml?WT.mc_id=Business_Popular_TaxRates

[11] http://www.state.nj.us/treasury/taxation/index.shtml

[12] http://www1.nyc.gov/site/finance/taxes/business-nys-sales-tax.page

[13] https://comptroller.texas.gov/taxes/sales/faq/local.php

[14] https://www.mass.gov/service-details/learn-about-massachusetts-tax-rates

[15] https://dor.wa.gov/find-taxes-rates/sales-and-use-tax-rates


© 2018 MT Law LLC. All Rights Reserved. Do not post without permission from the author.

Article drafted by Christie Yu, she was an intern with MT Law LLC.

Disclaimer

This article is for informational purposes only. It does not constitute advertising, legal advice or legal opinion. It is not promised or guaranteed to be correct or complete and may or may not reflect the most current legal developments. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, an attorney–client relationship. MT Law LLC and the authors expressly disclaim all liability in respect to actions taken or not taken based on the contents of this article. Readers with legal questions should consult an attorney. The choice of a lawyer is an important decision and should not be based solely upon informational articles.

ABOUT THE FIRM

MT Law is a full-service law firm representing clients in a wide range of practice areas including Business and Corporate Law, Immigration Law, Real Estate Law, Tax Law, Estate Planning and Intellectual Property. Headquartered in historic Lexington, Massachusetts, MT Law has additional offices spread across the United States in Boston, New York City, San Francisco, and Los Angeles, as well as offices in Beijing and Shanghai. For more information, please visit www.mtlawllc.com.

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