Top Tax Friendly States for your Middle Market Business—Does your State Make the Cut?

It's important for middle market companies to know what the most tax-friendly states are. A few years ago, I attended a conference of state legislators meeting in San Diego. Texas Governor Rick Perry was giving the luncheon speech, and the sponsors asked the Texans, which included me, to sit towards the front.

tax friendly states

The man sitting next to me told me he had a meeting with Perry after lunch. He owned a San Diego-based, middle market company with 250 employees providing financial services. Though he had always been in California, he was packing up the company and moving it to Texas. That's a huge step, and many companies are reluctant to take it. A new National Center for the Middle Market survey found that only about 10 percent of surveyed middle market companies have switched states. Of the remaining ones, only 21 percent have even considered moving.

The reluctance is understandable, given loyalty to the state or region — 73 percent in the NCMM survey say that founding location is very important — the cost and difficulty in moving, and the fact that many businesses have local clientele and can't migrate without essentially starting from scratch.

In the survey, 39 percent of respondents who considered moving said taxes would be the primary factor. But comparing state taxes on business is difficult because there can be several different taxes with varying rates that aren't necessarily comparable. Fortunately, the Tax Foundation crunches the numbers annually and publishes its findings. According to the organization:

  • The 10 best state business tax climates in 2014 are Wyoming, South Dakota, Nevada, Alaska, Florida, Washington, Montana, New Hampshire, Utah, and Indiana. Texas came in at 11.
  • The worst 10 are Maryland, Connecticut, Wisconsin, North Carolina, Vermont, Rhode Island, Minnesota, California, New Jersey, and New York.

Another 32 percent were looking for a better regulatory environment, and 23 percent cited lower cost of living. In practice, lower cost of living is like a tax cut because it leaves workers with more discretionary income.

CNBC ranks states by cost of living in its "America's Top States for Doing Business, 2013." In its report:

  • The 10 lowest cost-of-living states are Oklahoma, Tennessee, Kentucky, Idaho, Nebraska, Indiana, Arkansas, Kansas, Texas, and Mississippi.
  • The 10 highest are Vermont, Maryland, Massachusetts, Rhode Island, California, New Jersey, New York, Connecticut, Alaska, and Hawaii.

Interestingly, there is almost no overlap between the low-tax and the lost-cost states, but seven of the high-tax and high-cost states are the same.

The NCMM survey says the top destinations for middle market businesses are Texas (24 percent) and Florida (10 percent). Governor Perry is aggressively seeking to lure companies to the state, as is Governor Rick Scott of Florida. Scott told me personally a couple of years ago that he intended to beat Texas in the next annual Chief Executive magazine CEO survey of the best and worst states for doing business. Yet Florida came in second to Texas, which wins the survey every year. But it's that kind of state competition that's good for businesses.

Should more middle market CEOs in high-tax states consider moving? Yes. They should at least consider the costs and benefits.

  1. Check to see which low-tax states are offering additional tax breaks, credits, or subsidies to move — and be willing to drive a hard bargain. Cities in those states could sweeten the pot.
  2. Look to see if competitors have moved to, or are already located in, tax friendly states. If your competitors can sell at a lower price because of a low tax burden, that puts you at a competitive disadvantage.

But if you decide that a move is not for your company, you may still be able to reduce your taxes by lobbying state elected officials to lower them. Several of the high-tax states are losing businesses, and some of their state legislators realize they need to lower the tax rate if they want to stay competitive.

Merrill Matthews is an NCMM contributor and a resident scholar at the Institute for Policy Innovation in Dallas, Texas. Follow him on Twitter and circle him on Google+.


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