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A favorable "business climate depends upon more than taxes and regulations. As we discussed recently, It includes the caliber of the available workforce and the opportunities for work/life balance. However, there is no doubt that,given a choice between a large tax bill and a small one, few business owners would say “super-size my tax liability.” Choosing a tax friendly location for your business can be a significant competitive advantage—even for a small business.
The variety of taxes that states have created can boggle even the most active imagination, but most taxes fall into these major categories:
When considering the ideal location for your business, it’s important to go beyond the top-level considerations, such as the overall tax rate or the absence of a particular type of tax. For example, some states do not permit the same amount of deductions that the federal government allows. The difference in what income is taxable means that one’s income tax liability may be higher in one state—even though the tax rates are the same. Luckily, a business owner doesn't have to ponder all the complexities on his or her own. The Tax Foundation, a non-partisan, non-profit organization devoted to analyzing and understanding all tax issues, digs deep into the impact of these taxes and issues annual reports that compare over 100 different values to determine which “state tax systems are most hospitable to business and economic growth. "The results are published in their annual "State Business Climate Index."
For those evaluating business locations—particularly those in areas that border neighboring states—the Index provides excellent insights into the impact that taxes will have on your bottom line. For example, Illinois ranks 31 while neighboring Indiana is in the top 10 most favorable states. Similarly, Maryland is near the bottom of the list (41) while Virginia is solidly in the middle of the pack at 26. Tax law is ever changing, as states try and balance the need for revenue against the negative impact that a heavy tax burden will have on businesses. This negative impact is both direct and indirect. For example, onerous taxes can reduce the quality of the labor force as individuals migrate to “friendlier” jurisdictions.
North Carolina is a perfect illustration of how changes in the tax rates and structure can reap huge rewards in creating a business friendly climate. In the Tax Foundation’s survey released in October 2013, North Carolina was one of the 10 worst states for business. But, this dismal ranking is projected to change because 2014 ushered in phased reductions in both the personal (extremely important for LLC owners) and corporate tax rates. The impact of these changes is projected to be significant. The Tax Foundation predicts that the state will rocket from 44th place to 17th place as the recent tax reforms kick in. This will vault it into competitive position with Tennessee, a bordering state that has long been in the top 20 most favorable states for overall tax liability.
As noted at the outset, tax liability is only one factor to consider in choosing a business location. We are interested to hear your experiences with your state’s tax system, and whether you considered (or are considering) the tax burden when choosing your business location. Let us know what you think in the comments below.