How Good is Your State Tax System

Last updated on February 6, 2022

The tax system of a state directly affects how much tax its individuals and businesses pay. In response to the level of taxes a state levies, individual taxpayers and businesses decide whether to stay and/or invest in that particular state or move to a state with lower taxes. In Illinois in the last decade, then Governor Rod Blagojevich proposed a heavy gross receipts tax to which businesses negatively reacted and hundreds of millions of dollars of capital investments were delayed.

Increased taxes, including the individual income tax, sales tax, corporate tax or property tax can reduce a state’s revenue. Maine repealed its alternative minimum tax and changed its treatment of net operating losses, which improved its attractiveness to taxpayers.

Today’s market is mobile, and businesses prefer states with lower taxes. They locate and invest in states with the most favourable tax systems. On the contrary, states with higher taxes risk losing the businesses located in their state to other states due to higher taxes. Many businesses consider the tax system of a state before investing in it because it affects their competitiveness.

Competitiveness is not only limited to businesses, states are also aggressively competitive with their neighboring states. Most states look to increase taxes to boost economic growth. It is a direct method to improve revenue, but studies have shown that the opposite is true. A state’s national standing as a state with lesser taxes helps population growth, thus increasing revenue. A complex tax system influenced by political motivations is less likely to attract businesses than a simple tax policy based on creating favorable conditions for businesses.