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Business-Friendly Tax Policies: How the States Stack Up and Why You Should Care

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May 25, 2009

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A few different entities measure how business friendly the 50 states and District of Columbia are, when it comes to taxes.  Today let’s take a look at two of those rankings, and why you should care.


Small Business and Entrepreneurship (SBE) Council Business Tax Index

The Small Business and Entrepreneurship Council every year rates the 50 states and District of Columbia on how tax friendly their policies are toward small businesses.  The SBE’s rankings are here.  The map below shows the states (green is friendliest, red is least friendly, and blue is somewhere in the middle):

The rankings look at 16 different tax measures to come up with one tax score.  Among the taxes included are income, property, death/inheritance, unemployment, and various consumption-based taxes, including state gas and diesel levies. And so what are the top 10  jurisdictions with the best tax systems, according to the SBE?

Why Many Small Business Owners Care About Taxes

Now, why do many small business owners care about tax rankings?  And why should you care if you are not a business owner?

Well, it’s not so much the rankings themselves that matter.  It’s the attention they call to the taxes.

Having low tax rates for businesses is  something everyone should care about.  It may seem obvious to some why –  but let me walk you through one business owner’s views.

Taxes matter because they affect (1) how much you can grow your business, and (2) how much reward you can get for taking risks and making the sacrifices to build a business.  The first point impacts the economy - bigger businesses that spend more, impact the economy more.  The second point also has a ripple effect on the economy and the long term fiscal health of your state, because it goes to the business owner’s incentive to want to continue to take risks and stay in business and ultimately grow your tax base.

Let me explain.

Economic development officials like to say that favorable taxes spur new business investment.  That often gets interpreted as “more new business startups.”  Yet, I don’t believe entrepreneurs are thinking about taxes when we decide to start businesses.  Certainly — large corporation executives may examine taxes when deciding where to locate a new facility.

But for small business founders it’s different.  We start businesses in particular locales because it’s where WE are located.  We get caught up in the passion for our business and the excitement of the moment. We’re solely thinking about what it will take to make the business a success.  The thoughts that fill our minds in the early days are about how to get customers … and the mountain of work required to get a business off the ground.  In the beginning days, we might even welcome taxes.  Taxes would validate success — that we were bringing in enough money to have something to tax.  :)

It’s only later on, after the business achieves some level of success, that the reality of taxes starts to hit home.  Taxes impact your business’s ability to grow.  How much money is left over after taxes  impacts how much you have available to invest in capital purchases,  hire employees, spend on business services, pay in rent, buy vehicles for fleets — in short, the money you use to expand your business.

Taxes also impact how much money you, the business owner, have left over for yourself and your family.   I talk with a lot of business owners who tell me the same thing:  in the early days of their business they paid their employees or contractors or service providers more than they paid  themselves.   It’s pretty typical behavior to plow whatever money there is back into the business, rather than taking it out for yourself as salary or a distribution.   That is certainly true in my case.

This could mean years of sacrifice.

But as a business owner you are banking on it as being a temporary situation — even if temporary means 3, 5 or 10 years.  Getting repaid for all the sacrifices and risks you took as a business owner becomes more important as time goes on.  You’re making up for all the delayed gratification of the early years when you earned very little or nothing yourself, and quite possibly went into debt.

Yet it’s often the small businesses that have finally reached this point, after years of sacrifice, who taxing authorities start eyeing like a wolf eyeing sheep.

If business owners can’t feel sufficiently rewarded for all the sacrifice, there’s less incentive to take more risks to grow the business further or even stay in business.  And ultimately all the lip service paid to “entrepreneurship” and “small businesses”  in government and universities and think tanks won’t matter, if the risk/reward ratio is upside down.

This is why business-friendly tax policies matter.

What do you think?

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