California's tax climate for businesses is the third worst among the states, according to a report from the Tax Foundation, a nonprofit advocate for low taxes.
However, if state voters approve either Proposition 30 or Proposition 38 on the November ballot, California's ranking will drop even lower, said Tax Foundation Vice President Joseph Henchman, who runs the group's Center for State Tax Policy.
"We have run the numbers, and we will write a (separate) piece on that soon," he said. "We believe (Proposition) 38 does more damage (to California's business tax climate) than 30 does."
The Tax Foundation advocates for a tax system that is simple, broad-based and neutral (treats all taxpayers equally). Its annual State Business Tax Climate Index evaluates each state's tax system as of July 1 on 120 statutory variables focusing on individual income tax, corporate tax, sales tax, property tax and unemployment insurance tax.
The states ranking best by the Tax Foundation's measure are:
2. South Dakota
7. New Hampshire
Except for Utah, all of those states lack one of the three biggest taxes: sales tax, individual income tax or corporate income tax, the report said. "The lesson is simple: A state that raises sufficient revenue without one of the major taxes will, all things being equal, have an advantage over those states that levy every tax in the state tax collector's arsenal.
"It is important to remember that even in our global economy, states' stiffest and most direct competition often comes from other states," the report said. "The Department of Labor reports that most mass job relocations are from one U.S. state to another."
The only states that rank lower than California by the foundation's measure are New Jersey and New York.
According to the Tax Foundation website, California's top individual income tax rate is 10.3 percent; its corporate income tax is a flat 8.84 percent; sales tax is 7.25 percent; and property tax collections per capita are $1,465. The individual income tax is the second highest top rate and one of the most highly progressive structures in the nation.
"Since most small businesses are S Corporations, partnerships, or sole proprietorships, they pay their business taxes at the rates for individuals. That makes California's taxes on small businesses some of the most burdensome in the nation," the foundation said.
California ranks higher on some types of taxes than others. Its unemployment insurance tax is 16th lowest and its property tax rank is 17th lowest.
However, California's unemployment insurance trust fund ran out of money in 2009 and, as of May, was projected to have a $10.2 billion deficit by the end of this year. The state borrowed money from the federal government and is charging employers an extra $21 per worker per year to pay off that debt.
Distributed by MCT Information Services
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