The Tax Foundation has surveyed all 50 states on tax climate that businesses face and once again placed California near the bottom of the list. The Golden State ranked 49th, dropping one spot from the previous year’s ranking. Only New Jersey had a sorrier tax climate than California, according to the Tax Foundation analysis.
Why is the tax climate important for business? As the Tax Foundation points out, “The modern market is characterized by mobile capital and labor, with all types of businesses, small and large, tending to locate where they have the greatest competitive advantage. The evidence shows that states with the best tax systems will be the most competitive at attracting new businesses and most effective at generating economic and employment growth.”
The Tax Foundation report ranks California in different tax categories. While overall, the state placed 49th, the state’s Corporate Tax Ranking was 31; Individual Income Tax Rank was 49; Sales Tax Rank 43; Property Tax rank 14 and Unemployment Insurance Tax Rank 17.
The report made it clear that businesses didn’t rely exclusively on the tax climate in making business decisions. Skilled-labor pool, education and infrastructure are also factors business executives consider.
But tax systems can more quickly influence the business climate because tax changes can more easily be implemented when compared to making major changes in the areas of transportation, health care or education systems.
As the report notes, “It is important to remember that even in our global economy, states’ stiffest competition often comes from other states. The Department of Labor reports that most mass job relocations are from one U.S. state to another rather than to a foreign location.”
Business taxes are an important bottom line calculation. If taxes reduce profits that reduction is often passed to consumers through price increases, taken from employees through wage cuts or lost jobs or lowering shareholder dividends, all factors contributing to the business climate and business decisions, which in turn effects a state’s economy.
California has the top individual income tax rate, the top state sales tax rate, and is second in state gasoline tax per gallon rate. The Tax Foundation calculated that the state’s “Tax Freedom Day,” when a taxpayer has paid all tax obligations, is May 1.