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New Jersey, New York Have The Worst Business Tax Climates In America - Forbes

Author: Forbes

Source: https://www.forbes.com/sites/adammillsap/2023/10/30/new-jersey-new-york-have-the-worst-business-tax-climates-in-america/

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View of Manhattan from the air from a medium distancegettyNew Jersey and New York have the worst business tax climates in the country according to a new analysis from the Tax Foundation.These states have been here before: New Jersey has come in last since 2018, while New York has placed 49th since 2019.Both states are losing people to lower-tax states, so now is a great time for each to make some reforms and improve their ranking.According to the Tax Foundation, the lowest ranked states all suffer from complex, distortionary taxes with high rates.New Jersey has one of the highest property tax burdens in the country, as well as some of the highest corporate and individual income tax rates.New York’s individual income tax code ranks last due to its complexity and high rates, while its property tax rank is 49th. New York does reasonably well on the corporate income tax component, ranking 24th.Both New Jersey and New York fall closer to the middle on unemployment insurance taxes, ranking 37th and 39th respectively.The map below shows the overall ranking of each state.State Business Tax Climate RankingTax Foundation https://taxfoundation.org/research/all/state/2024-state-business-tax-climate-index/State business taxes impact economic growth and migration patterns.According to a recent analysis of IRS data from the Economic Innovation Group (EIG), New Jersey and New York were two of the biggest state losers in terms of adjusted gross income (AGI) flows during the pandemic.New Jersey lost $3.8 billion in net AGI, with most of it going to Florida. New York lost $24.5 billion in net AGI, and Florida was again the largest recipient at $9.8 billion.Florida ranks 4th on the state business tax climate index.At the local level, Manhattan was the biggest loser at $16.5 billion of AGI outflows to other states.The biggest recipient of those outflows?Florida.Miami-Dade County gained the most from New York City’s loss, while Palm Beach County also benefited handsomely.In addition to EIG’s analysis, other research shows that net migration is higher in states with lower tax rates. A 2022 study from the Baker Institute at Rice University by Jorge Barro shows that net migration rates and net AGI flows are both negatively correlated with top marginal income tax rates at the state level.As Barro notes “Lower state income taxation is shown to be associated with higher net taxpayer migration—a relationship that grows stronger with income.”While New Jersey and New York have been bad on taxes for years, other states have improved their ranking.Their reforms provide lessons for policymakers in the Empire and Garden State.In 2021, Arizona simplified its individual income tax rates by reducing its brackets from five to two.This caused Arizona to jump seven places in the individual income tax component of the index and five places in the overall index, moving from 19th to 14th.Mississippi improved its ranking from 27th to 20th by making several changes.First, it improved its corporate tax ranking by adopting permanent full expensing for qualified investments in machinery and equipment. Full expensing allows business to deduct expenses when they occur rather than stretching them out over years.This incentivizes capital investment by making it cheaper and more investment leads to more economic growth.Mississippi also moved to a flat individual income tax with only one rate, which improved its ranking on the individual income tax component from 26th to 19th.Mississippi’s ranking is likely to improve again next year due to a pending reduction in its income tax rate and the phasing out of its franchise tax, which is an anti-growth tax levied on the capital value of a business.A smaller improvement occurred in Pennsylvania.The state reduced its corporate income tax rate from 9.99% to 8.99% and has plans for future reductions until the rate reaches 4.99% in 2031.While modest, this one-point rate reduction improved Pennsylvania’s overall ranking from 33rd to 31st.All three of these states are good role models for New Jersey and New York. Given the terrible condition of each state’s tax code, relatively small changes like Pennsylvania’s corporate income tax cut may be a good place for each of them to start.Hopefully, after policymakers get a few pro-growth reforms under their belts and see the results—fewer people leaving their states, more economic growth—they will be inspired to continue making their tax codes more competitive.If not, each state can expect to lose more people and businesses to Florida, New Hampshire, Texas, and other low-tax states.

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