The Tax Foundation has released its annual State Tax Competitiveness Index, serving as a diagnostic tool that compares state tax structures across more than 150 different variables. Unlike many traditional studies that focus primarily on the total tax burden—evaluating how much states collect—this index places its emphasis squarely on the mechanics of taxation. By examining the how rather than just the how much, the index recognizes that there are economically sound methods for raising public revenue, as well as structurally flawed ones.
Inevitably, the publication of the annual rankings sparks immediate questions from taxpayers, business leaders, and policymakers alike. Chief among these recurring inquiries is a geographical puzzle: if states like Wyoming and South Dakota routinely secure the top positions in the rankings, why aren’t massive waves of corporations and major employers relocating to the Black Hills or the sprawling plains?
To understand this dynamic, public finance experts often look to a concept akin to WAR, or Wins Above Replacement, borrowed directly from the world of baseball analytics. In sports sabermetrics, WAR measures the additional wins a specific player provides to a team compared to a replacement-level player. Public finance operates under a remarkably similar principle. A well-structured, pro-growth tax code will not single-handedly transform a sparsely populated basin into a bustling global metropolis, just as a poorly designed tax structure will not instantly turn a thriving economic hub like Manhattan into a deserted ghost town.
Nevertheless, tax structure plays a tangible and often substantial role in a state’s broader economic successes or failures. A simple, neutral, transparent, and pro-growth tax system benefits every state, establishing a baseline environment where businesses and individuals can plan for the future without navigating unnecessary economic distortions.
The index evaluates and scores states across five distinct sub-indices, each representing a major component of state-level tax policy: corporate taxes, individual income taxes, sales and excise taxes, property and wealth taxes, and unemployment insurance taxes. Rather than assigning an arbitrary, equal weight to each category, the methodology determines weights based on the statistical variance across states within each specific area. This approach naturally places greater emphasis on categories where states have the widest latitude to compete and reform their policies.
Naturally, it is difficult to introduce structural design flaws into a tax that a government chooses not to levy. Consequently, states that completely forgo certain major taxes—such as the individual income tax, the corporate income tax, or the general sales tax—earn perfect scores on those specific sub-indices or portions thereof. This structural reality explains why states like Wyoming and South Dakota, neither of which imposes an individual or corporate income tax, perform exceptionally well in the overall index rankings.
However, states that choose to bypass one or more of these major revenue sources must adapt through other means. They often have to lean heavily on the remaining major tax types, which can result in lower rankings within those specific components. Alternatively, these states may choose to operate on leaner government budgets, capitalize heavily on abundant natural resources like oil and gas, or benefit from unique demographic profiles, such as Florida’s large retiree population, which allows alternative revenue streams to generate surprising amounts of income.
The extreme model demonstrated by Wyoming may not be politically or economically feasible for every state in the nation. Yet, a middle-ground approach remains entirely attainable, as demonstrated by states such as Missouri, Utah, North Carolina, North Dakota, Idaho, Indiana, and Oklahoma.
These seven states occupied the 9th through 15th positions in this year’s index. Notably, each of these states imposes all of the major broad-based taxes, but they do so at moderate rates and within the framework of comparatively well-designed, modern tax structures. Many of these jurisdictions have systematically modernized their tax codes over the past two decades. Utah initiated its modernization efforts back in 2006, followed by Indiana in 2011, and North Carolina through a successive string of comprehensive reforms beginning in 2013. More recently, Idaho implemented major tax updates in 2022, North Dakota followed in 2023, and Missouri pursued a series of rate cuts and structural reforms, including a planned capital gains tax repeal set for 2025. Oklahoma has likewise advanced significant reforms, eliminating its marriage penalty and capital stock tax in 2024 while reducing individual income tax rates and consolidating tax brackets.
For everyday taxpayers, the index functions as a reliable starting point for understanding how their home state compares to its regional and national peers. For policymakers and economic development officials interested in improving the fundamental design of their state tax codes, however, the index serves as a sophisticated diagnostic instrument. It features detailed tables that allow readers to draw direct comparisons regarding complex policy mechanisms, ranging from throwback rules and the tax treatment of net operating losses to whether individual income tax brackets are properly indexed for inflation and whether a state authorizes split-roll property taxation.
To illustrate the interplay between tax structure and public preference, experts note that if a state like South Dakota were suddenly saddled with New York’s complex tax code, its economy would likely struggle to adapt. History and economic behavior demonstrate that people are consistently willing to pay a premium to live, work, and operate businesses in New York—absorbing higher costs on real estate, consumer purchases, and state and local taxes.
Yet, there are distinct limits to this willingness. A tax structure that is bearable in the dense financial center of Manhattan can prove considerably more burdensome in upstate communities like Syracuse. Furthermore, as former New York governors have noted repeatedly when confronting multi-billion-dollar budget deficits, tax burdens and structural design matter deeply even in high-amenity states. Notably, New York managed to improve its standing in the corporate component of the index several years ago by enacting meaningful, bipartisan corporate tax reforms.
The ongoing debate over whether businesses would genuinely prefer to operate in smaller cities like Mitchell, South Dakota, rather than Manhattan, or Sioux Falls instead of San Francisco, highlights a broader truth about corporate site selection. A multitude of factors influences where companies choose to establish operations, extending far beyond statutory tax rates or structural codes.
The index itself measures tax structure rather than the myriad other elements that matter to businesses and workers, such as the availability of an educated workforce, regional quality of life, proximity to vital consumer and supply markets, or even local climate conditions. Navigating these factors often involves inherent trade-offs for state leaders. Nevertheless, tax policy remains one of the primary variables directly within the control of state policymakers. Even when operating within a fixed revenue target, governments retain the ability to choose between better and worse methods for raising those funds.
While taxes represent only one component of a complex economic ecosystem, modernizing a state’s tax structure helps position it for sustainable long-term growth. States that achieve higher marks on the index maintain better-structured tax codes, and states with better-structured tax codes secure a distinct advantage in economic competition.
