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South Dakota named best state for business taxes

Mt. Rushmore - S. Dakota is the best tax stateSouth Dakota has the nation's best tax climate for business in 2011, according to the Tax Foundation. The Mount Rushmore State won the distinction for the second year in a row, beating out also sparsely-populated Alaska for the number-one spot. Wyoming, Nevada, Florida, Montana, New Hampshire, Delaware, Utah, and Indiana round out the top 10.

The 2011 version of the State Business Tax Climate Index (SBTCI), released this week by the Tax Foundation, ranks states according to their tax systems and how they affect competition for new business and growth. Rankings are chosen not based merely on business tax burdens, but on a combination of tax factors that influence corporate decisions. Specifically, the rankings are based on five areas: major business taxes, individual income taxes, sales taxes, unemployment insurance taxes and property taxes.

The specific rankings in those five areas don't always correlate to the final rankings. For example, while the top of the list for corporate tax burden features South Dakota and Wyoming, New Hampshire is at the bottom -- even though New Hampshire was ranked in the top 10 for overall business tax climate.

Alaska tied with Florida and South Dakota with the most impressive individual income tax rank, while New York is ranked as the worst. New Hampshire was ranked as the most sales tax friendly state, while Washington state, which cites retail sales tax as a primary source of taxes, is firmly at the bottom. Oklahoma has the most desirable unemployment tax burden; Rhode Island has the worst. In the final category, New Mexico bests all states in terms of the most attractive property tax burden; Tennessee has the distinction of having the most onerous property tax burden.

Where are the worst states to do business? For the first time in five years, it's not New Jersey. New Jersey turned over the title of worst to New York. New York beat out the Garden State by having the perfect storm of bad tax rates: the third worst individual income tax, ninth worst sales tax and worst property tax. The Empire State is followed by, in descending order, California, New Jersey, Connecticut, Ohio, Iowa, Maryland, Minnesota, Rhode Island and North Carolina.

Not surprisingly, five of those states (California, Connecticut, Maryland, New York and New Jersey) recently enacted a so-called "Millionaire's Tax," which increased income tax rates for high wage earners.

Noticeably missing in the bottom 10 is Vermont. For the first time since the SBTCI was published, Vermont avoided being tossed in with the lowest ranked states, improving its position to 38 by, among other things, lowering its top individual income tax rate from 9.4% to 8.95%.

It will be interesting to compare this list with the Tax Foundation's list for next year. In 2010, there will be key gubernatorial elections in 39 states. Of those, at least 16 will certainly result in change, since term limits bar governors of those states from seeking reelection. The rankings for 2012 may be determined not over the next few months, but over the next few days ... at the ballot box.

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