A study has found that significant corporate income tax cuts result in an increase in corporate innovation, particularly amid financially constrained institutions. Another study found that a lower corporate tax rate actually increased job creation and firm entry—it also concluded that the firms that had responded to the tax cut have a tendency to be larger, showed increased productivity, and are more likely to survive after three years.
There is substantial evidence that indicates that corporate tax increases cause worse economic outcomes at a state level. With thousands of firms still in survival mode, it seems imprudent for financial sustainability to raise corporate taxes at a state or federal level. In the U.S., it is easier for tech businesses to change states than it is to leave the country since there are states that provide more attractive tax incentives than others.
Best States for Business Tax Climate
Texas– The state has no income tax, it does not impose any tax on estates, and its inheritance tax has been repealed since 2015.
Wyoming– The state of Wyoming does not impose any individual income tax, and it also does not levy a corporate income tax or a gross receipts tax.
South Dakota– South Dakota has zero individual income tax and does not levy any corporate income tax or gross receipts tax.
Alaska– Alaska is another great option for tech companies since it levies no individual income tax or state-level sales tax.
Florida– The sunshine state imposes no individual income tax, and it also has a low unemployment insurance tax.
Montana– The state’s constitution limits its sales tax to 4%.
New Hampshire– The state of New Hampshire has no state-level sales tax.
Nevada– The silver state has no corporate, franchise, or individual income tax.
Tennessee– The state law imposes zero individual income tax. A state sales tax of just 7% is the fundamental source of revenue.
Indiana – The state ranks among the best states for property tax rates.
For entrepreneurs that are looking for a state to incorporate their new tech startup, this website breaks down the state laws and provides the required resources to help business owners make better and more informed decisions.
How to Change to a Better Taxing State
As a corporation expands and develops, it is often a necessity to consider expanding into additional locations or, at times, having to relocate altogether. A company’s home base is traditionally the state that the business first incorporated in. The business is also considered a citizen of that state. Entrepreneurs have the options of:
Changing the state of incorporation without reincorporating- Depending on the state, foreign corporations may be able to change their state of incorporation to a different state. If the law allows this, the foreign corporation does not have to shut down and reform as a new business in the new state—allowing it to maintain its current structure and form.
Dissolving to reincorporate- The majority of U.S states require a corporation to file the appropriate dissolution documents when it shuts down before reincorporating in a new host state. The company will be required to pay out final paychecks, notify creditors, and file for its outstanding tax returns.
Conducting business in a foreign state- If a business wants to expand into other states, it can register with the necessary states as a foreign corporation—this allows for business operations within each state it registers with. This process eliminates the need for having to change the state of incorporation.
Final Thoughts
The U.S government advises entrepreneurs that “As a business owner, it’s important to understand your federal, state, and local tax requirements. This will help you file your taxes accurately and make payments on time. The business structure you choose when starting a business will determine what taxes you’ll pay and how you pay them.”
Since state tax laws differ, it is equally as important to choose the correct state at the onset since the process of relocating is not simple and may require the entire business to be dissolved before it can open up in a new state.