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October 14, 2004

Another national ranking of states blasts New York's business climate

For the second time this month, a major national study of the economic climates of the 50 states has ranked New York near the bottom.

A new study from the non-partisan Tax Foundation, the “State Business Tax Climate Index,” concluded that New York’s “tax climate” for business ranks 49th, ahead of only Hawaii’s. On Oct. 7, the Small Business Survival Index ranked New York State only 45th in an analysis of states’ hospitality to small businesses and entrepreneurs.

The study said the 10 states ranked at the bottom of the list, including New York, tend to have “complex, multi-rate corporate and individual income taxes with above- average tax rates; above-average sales tax rates that don’t exempt business-to-business purchases; complex, high-rate unemployment tax systems; and high overall state tax collections with few tax or expenditure controls.”

In contrast, the index tends to reward tax codes that “are neutral, have low and flat rates, are simple and transparent, avoid double taxation, and have statutory or constitutional restraints that keep tax burdens low over time,” the foundation said.

As in the Small Business Survival Index, New York was outranked by all of its neighbors: Pennsylvania (ranked 22), Ohio (29), Massachusetts (33), New Jersey (34), Connecticut (37), and Vermont (45). South Dakota ranked first on the index.

The report noted that tax competition among states is a crucial factor in job movements within this country.

“Less than one percent of job relocations in recent years have been outsourced overseas,” the report said. “That leaves 99 percent that have shifted from one U.S. state to another.”

The State Business Tax Climate Index ranked states on the basis of “economic neutrality,” the foundation said in a release. This means that “if a state’s tax system maintains a ‘level playing field’ for businesses, the index considers it neutral and ranks it highly.”

To make its judgements about economic neutrality, the index considered five factors: corporate income tax, individual income tax, sales or gross receipts tax, unemployment insurance tax, and the state’s fiscal balance.

“The ideal tax system, whether at the state, federal, or international level, should be neutral to business activity,” said Scott Hodge, president of the Tax Foundation. “In such a system, people would base their economic decisions on the merits of the transactions rather than the tax implications.”

The Foundation created the index to help businesses and lawmakers understand the competitive “gauge” of each state’s tax system.

Businesses consider state taxes before deciding to relocate or establish themselves in a certain area, the report said. “The structure and complexity of a state’s tax system can be as important to businesses as the amount collected.”

The index helps businesses by helping them understand how much they are paying and whether they are paying it in an economically efficient way,” the report said.

“The goal of the index is to focus lawmakers on good-tax fundamentals in their states, rather than short-term tax abatements and exemptions designed to temporarily lure high-profile companies, baseball teams, and auto plants from other states,” the foundation’s release said.