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Ranking Sales Taxes on the 2021 State Business Tax Climate Index

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Today we continue our map series on the 2021 State Business Tax Climate Index with a map showing states’ rankings on the Index’s sales and excise tax component. A state’s sales tax rate and structure can make a state more or less attractive to businesses for two key reasons: (1) some states apply the sales tax to business inputs, which drives up the costs of production, and (2) as sales tax rates increase, consumers may cut back on purchases or move their shopping to lower-tax jurisdictions. The sales tax component accounts for 24.4 percent of each state’s overall Index score.

An ideal sales tax applies to a broad base of final consumer goods and services, with few exemptions, and is levied at a low rate. Broad-based, low-rate tax structures minimize tax-induced economic distortions that can occur when people change their purchasing behavior because of tax differences. In addition, sales tax exemptions narrow the tax base, driving up the sales tax rate on those goods and services that remain subject to the tax or forcing greater reliance on less economically efficient taxes.

It is important to note that a well-structured sales tax applies only to the final consumer at the point of sale. It does not apply to the sale of machinery, raw materials, and other business inputs, as those taxes increase the costs of production and ultimately get passed along to consumers in the form of higher prices. States that avoid taxing business inputs perform better on the Index.

This section of the Index also looks at how states apply their sales taxes to remote sellers. While most states have adopted safe harbors for small sellers and have a single point of administration for all state and local sales taxes, a few are penalized because they diverge from these practices, imposing substantial compliance costs on out-of-state retailers.

 

As shown on the map, the highest-scoring states on the sales tax component of the 2021 Index are those without a state sales tax: New Hampshire, Delaware, Montana, Oregon, and Alaska. (They do not receive perfect scores because each state does impose excise taxes with varying degrees of competitiveness, and Alaska permits local sales taxes.) The states with the next best scores—Wyoming, Wisconsin, Maine, Idaho, Michigan, Virginia, and Massachusetts—have well-structured sales taxes and modest excise tax rates.

States that rank poorly on this component have high sales tax rates, high excise tax rates, complicated sales tax administration, and apply the sales tax to a variety of business inputs while exempting many final consumer purchases. The lowest-scoring states are Alabama, Louisiana, Washington, Tennessee, and Arkansas.

To learn more about your state’s score on the sales tax component, click here.

To see whether your state’s sales tax structure has become more or less competitive in recent years, check out the following table.

Sales Tax Component of the State Business Tax Climate Index (2017–2020)
State2021 RankChange from 2020 to 20212020 Rank2019 Rank2018 Rank
Alabama500505049
Alaska50555
Arizona400404044
Arkansas460464546
California450454640
Colorado361373737
Connecticut260263031
Delaware20221
Florida210212228
Georgia272292930
Hawaii300303326
Idaho92111215
Illinois38-4343527
Indiana20020139
Iowa140141819
Kansas371382729
Kentucky130131914
Louisiana49-1484850
Maine80888
Maryland181191718
Massachusetts120121011
Michigan100101412
Minnesota280282625
Mississippi321333639
Missouri240242524
Montana30333
Nebraska150151121
Nevada440444443
New Hampshire10112
New Jersey420424242
New Mexico410414141
New York430434345
North Carolina220222420
North Dakota29-2273135
Ohio34-2322832
Oklahoma390393936
Oregon40444
Pennsylvania170172122
Rhode Island250252323
South Carolina310313433
South Dakota332353234
Tennessee470474747
Texas351363838
Utah230231517
Vermont160162016
Virginia11-29910
Washington481494948
West Virginia19-1181613
Wisconsin70777
Wyoming60666
District of Columbia342363235

Note: A rank of 1 is best, 50 is worst. All scores are for fiscal years. DC’s score and rank do not affect other states.

Source: Tax Foundation.

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