California Has Nation's Third-Worst Business Tax Climate, Study Finds

California has the third-worst business tax climate in the nation, topping only New Jersey and New York, the Washington, D.C.-based Tax Foundation reported October 22.

The states ranked in the bottom 10 “tend to have a number of afflictions in common: complex, nonneutral taxes with comparatively high rates,” the report notes, adding that taxes are a major factor in where businesses choose to operate and expand.

“Every tax law will in some way change a state’s competitive position relative to its immediate neighbors, its region, and even globally,” the report states. “Ultimately, it will affect the state’s national standing as a place to live and to do business. Entrepreneurial states can take advantage of the tax increases of their neighbors to lure businesses out of high-tax states.”

The rankings are based on each state’s individual income tax, sales tax, corporate income tax, property tax and unemployment insurance tax as of July 1. California’s rank for each component: individual income tax (49), sales tax (45), corporate income tax (28), property tax (16) and unemployment insurance tax (22).

Although the property tax ranking appears to be a bright spot, it may be artificially high. The Tax Foundation’s rankings do not consider parcel taxes and Mello-Roos taxes, which are property and land taxes that cannot be legally tied to a property’s value, but often are based on parcel characteristics, and in some cases, may equal or exceed a property owner’s ad valorem tax. Parcel taxes are imposed locally by the state’s 58 counties, 432 cities, and more than 3,400 special districts, and are unique to California.

“Since property taxes can be a large burden on business, they can have a significant effect on location decisions,” the report notes. The report cites several academic studies that revealed negative effects of property tax increases, including a 2000 study by Stephen Mark, Therese McGuire and Leslie Papke that found higher taxes on business are associated with lower employment growth.

California has ranked third-worst for many years, with the exception of last year when the Tax Foundation ranked California as having the second-worst business tax climate.

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