Most of the state or local “best of business” rankings place heavy emphasis on taxes, typically giving high ranks to states that have low taxes (e.g. the Small Business and Entrepreneurship Council’s Business Tax Index) or for offering generous tax incentives for business re-locations (e.g. Site Selection’s Top Business Climate Rankings). But, what about the effective administration of tax rules and regulations? We know that these regulatory issues matter, both in the U.S. and overseas. For example, the World Bank’s annual Doing Business rankings place heavy emphasis on tax rules, and countries that improve their rankings also tend to improve their overall economic performance as well.
A new report from the Council on State Taxation (COST), “The Best and Worst of State Tax Administration,” ranks states on the fairness, transparency, and effective administration of their tax systems. Some interesting results jump out. The top performer is Maine–a state that typically ranks low in other assessments and whose own governor regularly criticizes for being unfriendly to business. Other top performers are Ohio, Alaska, Arizona, Kansas, Montana and Pennsylvania. On the flip side, many of the weakest systems are found in states that often rank high in other business climate rankings. Louisiana, Alabama, Colorado and Nevada are all in the worst performing group in the COST analysis. California,the overall weakest performer, typically ranks poorly in other business climate assessments.
What can we glean from these results? Many things matter for a “friendly” business climate. While low taxes are nice, business leaders regularly note that they seek transparency, consistency and clarity in these rules and regulations. It’s not enough simply to reduce taxes; effective administration also matters.