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Underdog States Improve Their Business Tax Climate

Free markets work, and policymakers should heed the lessons from these tax climate rankings.

By guest author Vance Ginn
November 14, 2023

The rise of several underdog states and the fall of previous favorites tells the story of the Tax Foundation’s new 2024 State Business Tax Climate report. The findings support how less government contributes to more flourishing, while heavy-handed taxes hinder prosperity.

The scores for the 50 states in the report declined by 0.19 points from the prior report, indicating a less overall competitive business tax climate nationwide. Considering that half of all states have cut taxes over the past three years, and an increasing number are moving to flax taxes, pressure is building on states to seek tax cuts or risk getting left behind.

An inspiring success story is Iowa, which has emerged as a beacon of pro-growth tax reform. Iowa reduced its top marginal individual income tax rate from 8.53 to 6.0 percent. By consolidating its previous nine tax brackets into four, the newer, more streamlined tax system is less burdensome for Iowans.

Another improvement in Iowa’s reforms was reducing the marriage penalty. The state removed a longstanding tax burden by doubling the bracket amounts for married couples filing jointly. The state also shifted its previously three-bracket corporate income tax structure into just two brackets, which caused the top rate to drop by 1.4 percentage points.

As a result of these changes, Iowa’s ranking improved from 38th to 33rd in just one year.

While there’s room for improvement, the state is on a better path. Considering the conservative budgeting by Governor Reynolds and the legislature, and the transition to a flat 3.9 percent income tax rate by 2026 and a flat corporate income tax rate of 5.5 percent, the state could soon be on its way to 15th place.

Massachusetts, on the other hand, experienced the sharpest decline of all the states, plummeting 12 places down to 46th.

This regression in business tax competitiveness can be largely attributed to a new state constitutional amendment. It transitioned Massachusetts from a single-rate to a graduated-rate income tax system with a new 4 percent surtax for a top marginal tax rate of 9 percent for incomes over $1 million.

This progressive policy not only represents a departure from the trend of rate reductions and bracket consolidation in other states as part of the flat tax revolution, but also introduces a significant marriage penalty. While implementing a new payroll tax further contributed to Massachusetts’s decline in tax competitiveness, the state’s individual tax component ranking fell from 11th to 44th.

Unfortunately, this fall was foretold by the vast number of people fleeing the state, many of whom were no doubt searching for a more tax-friendly place of residence. After all, people vote with their feet.

While Massachusetts experienced a sharp fall, Mississippi and Idaho emerged as rising stars in the world of tax reform.

Mississippi’s ranking jumped from 27th to 20th thanks to three major shifts. It became the second state to implement permanent full expensing for select investment in machinery and equipment, passed a flat personal income tax, and will soon phase out its franchise tax.

These forward-thinking policy changes encourage investment and economic growth, positioning Mississippi as a more competitive business destination.

Likewise, Oklahoma has also made significant strides in tax reform. In addition to eliminating its marriage penalty, the state reduced its split roll ratio in property taxation and withdrew its capital stock tax. These actions propelled its property tax component ranking to substantially improve from 30th to 15th.

As a result of these reforms, Oklahoma’s overall ranking has risen significantly, now at 19th. And while Governor Stitt’s recent special session was unsuccessful in making bigger strides for tax cuts, the state looks poised to do so soon, thereby improving its competitiveness.

On a similar path, Idaho made a noteworthy move by transitioning from four brackets to a flat individual income tax at 5.8 percent. Additionally, the state cut its corporate income tax rate to 5.8 percent, further enhancing its tax competitiveness. These reforms boosted its individual tax component rank by two places, now at 17th.

The findings from the Tax Foundation’s report underscore a fundamental economic truth: Free markets do not discriminate. They thrive where they are permitted to flourish, and that starts with sustainable budgeting and sound tax policy.

States like Iowa, Oklahoma, Mississippi, and Idaho, which prioritize tax cuts and financial freedom, are poised to rise in the rankings and could quickly become some of the more sought-after states. As they continue to reduce tax burdens, they create environments where individuals and businesses can retain more of their earnings, which invites innovation, improves the quality of life, and encourages moving to those states.

Meanwhile, states like Massachusetts and New Jersey, which ranks 50th in the report, choose high spending and taxes that will contribute to continued out-migration as individuals and businesses seek refuge in states prioritizing economic freedom.

The message is unmistakable. Free markets work, and policymakers should heed the lessons from these tax climate rankings.

This piece was first published on AIER.org, you can find it here.