Not all states are created equal when it comes to business taxes. The bottom line is that you get to keep more of your hard-earned profit depending on where your business is located.
For this reason, Americans are fleeing their home states for tax-friendly ones like Florida. In fact, one million people have left New York City’s tri-state region. Residents of California are also leaving and relocating to Texas for to enjoy their less stringent business tax laws.
Read on to learn about the worst states for filing businesses taxes.
1. New Jersey
In the past, New Jersey was an appealing place to do business due to its proximity to New York City. The northeast portion of the state is densely populated and a short commute to the city.
However, the state’s heavy tax burden is forcing its business owners to move South. The Small Business & Entrepreneurship (SBE) Council ranks New Jersey the worst state in the union for small businesses.
New Jersey applies a 9 percent Corporation Business Tax. The threshold for this rate is just $100,000. This high business rate is in addition to excessive property taxes, sales tax, and cost of living. For these reasons, NJ has the highest total tax burden in the country on businesses.
2. New York
The Tax Foundation ranks New York as the second-worst state to do business. In 2019, the state’s population decreased by 76,000, which marked the highest decline in the nation.
The vast majority of fleeing residents cite tax policy as a primary reason for departing. In New York, your business is getting hit with high taxes from every direction.
For those that own commercial real estate, the property tax burden is 4th highest in the nation. This is coupled with the 7th and 13th highest sales tax and unemployment insurance tax rates in the country, respectively.
3. Rhode Island
For now, we remain in America’s Northeast corridor. Next on the list of our worst-taxed states is tiny Rhode Island. While the state is small, its tax burden is large.
Rhode Island has the 10th highest corporate tax rate. In addition, the state has the 5th highest property tax rates. High taxes on commercial real estate negatively affect profit for businesses that own property.
The reason that Rhode Island is ranked so high on our list is its share of new business startups. In 2019, just 0.12 percent of the state’s population started a new business.
This left Rhode Island ranked lowest in the nation for entrepreneurs. Tax policy is a significant barrier to entry for new businesses.
4. California
Let’s travel to the West Coast for number four on our list. California, the largest state with the highest GDP, also places a heavy tax burden on its business owners.
Like New York City, many residents in California are relocating to tax-friendly states. In 2018, nearly 700,000 citizens left the state.
The SBE Council ranks California 49th out of 50 states for small business tax burden. California currently has a corporate tax rate of 8.84 percent. While this tax rate ranks 28th, there are other factors driving California to the bottom.
California is one of the most expensive states to live in. It also has the 2nd highest individual income tax rate, meaning employees demand higher salaries. There is a compounding impact of these costs and is ultimately borne in part by the business.
5. Connecticut
After a brief stint to the Pacific Ocean, we are back in the Northeast corridor. Coming in at number five on our list is the state sandwiched between New York and Rhode Island.
Connecticut’s appeal lies in its proximity to New York City. However, the state carries a heavy tax burden for small businesses and corporations.
The corporate tax rate is currently 9 percent, which even manages to match New Jersey. Connecticut also has the highest property taxes in the nation.
6. Illinois
Home of the Windy City, Chicago, Illinois is the first state in America’s interior to show up on this list. The state’s corporate tax rate is the 14th highest in the nation. On top of high corporate taxes, they also have the 10th highest property taxes and unemployment insurance tax.
The state is having a host of financial issues, including serious budget shortfalls and compounding debt. Looking forward, some experts expect the state to raise corporate tax rates even higher to resolve budget issues.
7. Minnesota
North of Illinois, you will find the state with one of the highest corporate tax rates in the nation. Minnesota’s corporate tax rate sits at 9.8 percent.
It is a flat tax rate applied to gross income. C-corporations are hit especially hard by Minnesota’s high taxes.
Other business types try to avoid this high rate by identifying as a flow-through entity. This includes sole-proprietorships and S-corporations.
Minnesota’s citizens are not spared from the high taxes applied to C-corporations. Instead, individuals are taxed at the 4th highest rate in the nation.
8. Iowa
The next state comes as a major surprise. Typically, you do not see high corporate tax rates in rural, interior states. However, Iowa is the exception to the rule.
If your business earns more than $250,000 per year, a 12 percent corporate tax rate may be applied. The good news is that the tax rate is marginal and reduces for businesses earning less income. For example, the rate drops to 8 percent if the business earns less than $100,000 per year.
Surprisingly, Iowa also has the 8th highest individual tax rate as well. In addition, the state ranks 15th for property and unemployment insurance taxes. There is little relief in sites for businesses, leaving Iowa amongst the states with the highest tax burdens.
A Recap of the 8 Worst States for Business
Some states make it hard to maximize profit. These states can take 10 percent or more off the top of your business income.
In some cases, tax issues are compounded by property and unemployment insurance taxes. If you live in one of the worst states for business, contact us today for tax assistance.
