Best & Worst States for Business

Best & Worst States For Business 2023: A Taxing Time

Windfalls of federal funds and competition for huge new economic plums have set off a tax-cutting derby among states as they leverage the unprecedented bounty to compete for more big development prizes than ever before. Politicians, development officials and business leaders are pursuing a new generation of industry clusters—including pharmaceutical manufacturing, technology research, distribution centers and electric-vehicle and microchip-making plants—that have them slashing tax rates and creating new business incentives at a feverish pace.

Among other things, the new possibilities for beefing up their economic bases and job growth have allowed state officials to look with actual relief at the troubles Virginia is now facing with the construction pause on Amazon’s HQ2, a prize that five years ago was being pursued by the entire country.

“States have experienced a sustained period of robust economic growth, even independent of federal aid,” says Jared Walczak, vice president of state projects at the Tax Foundation. “So their own tax revenues have grown substantially. And states generally have been good about determining what portions of [federal] monies are sustainable and which are one-time things.”

In fact, more than half of states have cut tax rates in the last two years, according to the Tax Foundation. This has set off big regional competitions. Colorado, for instance, adopted a 4.4 percent top rate on income, and Arizona slashed its rate to 2.5 percent, leapfrogging the rate cut to 5 percent that Utah adopted five years ago.

A movement toward flat income taxes favored by businesses has also spread, with Georgia, Mississippi, Arizona and nine other states joining Idaho in enacting one. In the Midwest, for instance, this set off a flurry of copycat moves, such as Iowa’s cut in its top tax rate to 3.9 percent from 8.5 percent in 2026, helping prompt Wisconsin’s GOP legislature to propose a major tax cut that includes a flat rate of 3.25 percent on income.

Meanwhile, states are learning how to leverage a total of hundreds of billions of dollars of federal largess from Covid-era relief, chunks of the new infrastructure bill, provisions from the Inflation Reduction Act, and industrial and technology subsidies from last year’s CHIPS legislation to gussy up their profiles without running afoul of federal rules about exactly how they can spend the funds.

“The funding has provided an opportunity for states to address not only pandemic health and the economic fallout that happened from a budgetary standpoint but has also provided them the chance to make targeted investments” in areas ranging from bridge repair to beefing up education programs, says Emily Maher, project manager of fiscal affairs for the National Conference of State Legislatures. “Each state has its own gaps and challenges.”