California continues to have one of the worst business competitiveness climates in the country thanks to its high corporate, individual and sales tax rates. The only states that rank worse overall than California are New York and New Jersey, but California is still the worst when it comes to gas taxes, sales taxes and the top marginal tax rate.
These are the latest findings from the Tax Foundation’s 2024 State Business Tax Climate Index, a report that aims to help business leaders, government policymakers, and taxpayers gauge how their states’ tax systems compare. While there are many ways to show how much is collected in taxes by state governments, the Index is designed to show how well states structure their tax systems and provides a road map for improvement.
California has the highest taxes on gasoline and top income earners in the country.
Besides having the top marginal individual income tax rate (13.3%) in the country, California ranked second from the bottom in the Index’s individual income tax component of state rankings; only New York ranked worse.
There is a sliver of good news: California ranked 22nd for the property tax component, thanks to the legacy of Proposition 13.
The five worst states in this year’s Index are:
- New York
- New Jersey
The five best states are:
- South Dakota
Why High Taxes Matter
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.
“State lawmakers are right to be concerned about how their states rank in the global competition for jobs and capital, but they need to be more concerned with companies moving from Detroit, Michigan, to Dayton, Ohio, than from Detroit to New Delhi, India. This means that state lawmakers must be aware of how their states’ business climates match up against their immediate neighbors and to other regional competitor states,” the Tax Foundation said.
Businesses locate where they have the greatest competitive advantage. 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.
A high sales tax, for example, has been found to have a negative effect on small businesses and startups, and can deter companies from locating facilities in a state.
To read the Tax Foundation’s State Business Tax Climate Index click here.