Washington ranks in top 10 for business-friendly tax climate

Washington state improved its standing in a national assessment of how friendly state tax systems are to businesses, moving from No. 8 last year to No. 7 this year, according to a report released Wednesday by the nonpartisan Tax Foundation.

The Washington D.C.-based tax research group, which has analyzed fiscal policy at the federal, state and local levels since 1937, said the absence of an individual income tax in Washington puts it among the 10 states with the best tax systems under which to attract new companies and to expand existing ones.

All but one of the states that rank in the top 10 “do without at least one of the major taxes,” said Mark Robyn, economist for the Tax Foundation and author of the group’s State Business Tax Climate Index. And Washington’s lack of an individual income tax is an “obvious strength,” Robyn said. “That can be very positive for competitiveness. Washington reaps some benefits from that.”

Indeed, Ken Fisher, CEO of Fisher Investments, says his company’s decision to expand in Camas has largely been because of the advantages of Washington’s tax climate. Fisher Investments is headquartered in California, which ranked No. 48 in the country.

Oregon did not fare as well as its neighbor to the north. However, the state improved its position in the Tax Foundation report, moving from 15th last year to 13th this year. That was due partly to its lack of a sales tax.

“The five states without a state sales tax — Alaska, Delaware, New Hampshire, Oregon and Montana — achieve the best sales tax component scores,” according to the report. By contrast, the report noted, Arizona, Louisiana and Washington levy sales tax “on many business inputs — such as utilities, services, manufacturing, and leases — and maintain relatively high excise taxes.”

The report also noted that Oregon’s score on individual income tax will improve next year since its top individual income tax rate will fall from 11 percent to 9.9 percent in 2012. That reduction is the result of Measure 66 — approved by Oregon voters in January 2010 — which temporarily increased income tax rates on high-income taxpayers from 9 percent to 11 percent for 2009 through 2011.

At the same time, the report noted, Oregon’s top corporate income tax rate will increase beginning in 2013 as a result of 2010’s Measure 67.

The 10 best states in the Tax Foundation’s report this year are Wyoming, South Dakota, Nevada, Alaska, Florida, New Hampshire, Washington, Montana, Texas, and Utah. “Many of these states do not have one or more of the major taxes,” according to the report, “and thus do not have the associated complexity and distortions.”

The 10 lowest-ranked, or worst, states, from No. 41 to No. 50 are Iowa, Maryland, Wisconsin, North Carolina, Minnesota, Rhode Island, Vermont, California, New York, and New Jersey.

The Tax Foundation’s 2012 report represents the tax climate of each state as of July 1, 2011 — the first day of the standard 2012 state fiscal year.

The report compares states on 118 variables in five areas of taxation: major business taxes, individual income taxes, sales taxes, unemployment insurance taxes and property taxes.

Each state’s ranking is relative to the actual tax policies in place around the country, “not a measurement against a theoretical ‘perfect’ system,” the Tax Foundation said in a news release.

The group’s report is intended to enable business leaders, government policymakers and taxpayers to measure how their states’ tax systems compare.

“While some similar studies focus on the total amount residents pay in taxes each year,” the Tax Foundation said, its report “focuses on how elements of a state tax system enhance or harm the competitiveness of a state’s business environment.”