California Ranks Near Bottom in State Business Tax Climate: Report

People walk past empty stores and restaurants in Beverly Hills, Calif., on May 8, 2020. (Mark Ralston/AFP via Getty Images)

California is one of the worst states for business taxes again this year because of its high income and sales taxes, according to the Tax Foundation, a Washington tax-policy nonprofit.

The foundation’s 2024 State Business Tax Climate Index ranked the Golden State 48th, after giving it the same ranking last year, followed only by New York and New Jersey.

The bottom 10 states on this year’s list have complex taxes with high rates, according to the foundation.

California has a graduated individual income tax, which charges residents 1 percent to 13.3 percent according to their income. The state also imposes an 8.84 percent corporate income tax—the seventh highest in the nation, according to the Tax Foundation.

The state also charges another 7.25 percent state sales tax on purchases, including for those online and for items purchased out-of-state for use in California. A maximum local sales tax rate of 2.5 percent is added to the state sales tax, making an average combined state and local sales tax rate of 8.82 percent.

A sign telling customers that the business has closed and moved to a different city is posted on a closed financial district restaurant in San Francisco on Aug. 25, 2022. (Justin Sullivan/Getty Images)

New York ranked 49th on this year’s list with slightly more burdensome taxes for its residents and businesses. The Empire State also uses a sliding scale individual income tax rate from 4 percent to 10.9 percent, depending on a resident’s income. The state also has some jurisdictions that collect local income taxes.

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It also has a 6.5 percent to 7.25 percent corporate income tax rate, which ranked 18th for highest corporate rates. On top of that, New York also has a 4 percent state sales tax and a maximum local sales tax of nearly 4.9 percent. It has an average combined sales tax of 8.52 percent.

New Jersey ranked as the worst state regarding taxes for businesses, with a corporate income tax rate of 6.5 percent to 11.5 percent, the highest in the nation, the foundation reported. The state charges residents a personal income tax rate of 1.4 percent to 10.75 percent, depending on income.

New Jersey also has a 6.3 percent state sales tax rate and a maximum local sales tax rate of 3.3 percent, creating an average combined sales tax rate of 6.6 percent.

“New Jersey ... is hampered by some of the highest property tax burdens in the country, has the highest-rate corporate income taxes in the county, and has one of the highest-rate individual income taxes,” according to the report’s executive summary.

“Additionally, the state has a particularly aggressive treatment of international income, levies an inheritance tax (up to 16 percent), and maintains some of the nation’s worst-structured individual income taxes.”

A customer enters a Block Advisors tax preparation office in San Anselmo, Calif., on April 15, 2019. (Justin Sullivan/Getty Images)

Some States Reduce Taxes

Arkansas decreased its corporate income tax rate this year, dropping it from 5.9 percent to 5.3 percent after the state Legislature passed accelerated individual and corporate income tax reductions in 2022.

Meanwhile, Iowa consolidated its corporate income tax structure from three brackets to two brackets at the beginning of this year after the state met revenue goals earlier than expected.

New Hampshire’s business profits tax, the state’s corporate income tax, was lowered from 7.6 percent to 7.5 percent starting this year after state lawmakers passed legislation in 2022 requiring it to do so.

Pennsylvania also cut its corporate net income tax from 9.99 percent to 8.99 percent at the start of this year. The rate will continue to decrease by half a percentage point each year until it reaches 4.99 percent in 2031.

In addition, Idaho’s corporate income tax rate was reduced from 6.5 percent to 6 percent retroactive to Jan. 1, 2022, under a new law passed last year.

10 Best States for Business Taxes

The absence of a major tax is common among many of the top 10 states, according to the foundation.

The top 10 starting with No. 1 are Wyoming, South Dakota, Alaska, Florida, Montana, New Hampshire, Nevada, Utah, North Carolina, and Indiana.

Lights flicker in the Welcome to Fabulous Las Vegas sign on the Las Vegas Strip in Las Vegas on Feb. 28, 2022. (Ethan Miller/Getty Images)

“This does not mean, however, that a state cannot rank in the top 10 while still levying all the major taxes,” the authors wrote in the report’s executive summary. “Indiana and Utah, for example, levy all the major tax types but do so with low rates on broad bases.”

In first place again this year, Wyoming doesn’t have individual or corporate income taxes. The Cowboy State also has a low state sales tax rate of 4 percent and a maximum local sales tax rate of 2 percent. The average combined local and state sales tax rate is 5.36 percent.

Nevada, South Dakota, and Wyoming have no corporate, individual, or state sales tax. Nevada imposes gross receipts taxes, however, which is a tax applied to a company’s gross sales without deductions for expenses such as the cost of goods sold. In Nevada, the rate a business pays ranges from .05 percent to 0.3 percent annually.

Alaska has no individual income tax or state sales tax, while Florida has no individual income tax, and New Hampshire and Montana have no sales taxes.

North Carolina rose one place this year, from 10th to ninth, compared to the 2023 list, and Indiana dropped from ninth to 10th.