The Small Business & Entrepreneurship (SBE) Council annually ranks US States in its Business Tax Index - Best to Worst State Tax Systems for Entrepreneurship and Small Business.
The study looks at 16 different tax measures and combines them into a single score in order to rank the 50 US states and DC in terms of their tax impact on small businesses and entrepreneurs. Following are the ten best and ten worst state tax systems for entrepreneurs.
10 Best State Tax Systems for Small Business
Here is the SBE's assessment of which states rank most favorably for small business entrepreneurs when it comes to each state's tax system for 2007:
- South Dakota (Best)
- Nevada
- Wyoming
- Washington
- Florida
- Alaska
- Texas
- Colorado
- Alabama
- Mississippi
10 Worst State Tax Systems for Small Business
Here is the SBE's assessment of which states rank least favorably for small business entrepreneurs when it comes to each state's tax system for 2007:
- Vermont
- Massachusetts
- New York
- Rhode Island
- Maine
- Iowa
- California
- Minnesota
- New Jersey
- District of Columbia (Worst)
Why Home Business Entrepreneurs May Not Agree
While looking at 16 different tax factors was probably done in the interest of being thorough, not all of the tax factors really apply to home businesses. Here are some factors considered in the study that may not apply to your home business:
- Top individual capital gains rate
- State corporate capital gains rate
- Property taxes (you're already paying them anyway, unless you rent your home)
- Whether or not the state imposes a death tax
- Unemployment tax rate (not relevant unless you have employees)
- Gas tax and diesel tax (unless your home business involves a lot of road travel or making deliveries)
Frankly, I was quite surprised that my state of New Hampshire ranked only 26th. Yes, our property taxes are high (but not as high as some other states), but we have no state personal income tax (except on most dividends and interest in excess of $2400) and no state sales tax. Businesses do have to pay 8.5% income tax on the net income of any business that has gross income exceeding $50,000. But that $50,000 threshold gives new home business entrepreneurs time to get up and running before worrying about state income taxes on their revenues. And because there's no state sales tax on most items (restaurant meals, hotels, etc. have their own tax requirements), home business entrepreneurs are relieved of having to get a sales tax license along with the regular reporting requirements that go with it.
