Tennessee's tax climate for business fell below average for the first time as rising property taxes hurt the Volunteer State's attractiveness for business, the Tax Foundation reported Tuesday.
PDF: Tax Foundation business tax climate
In its 2011 business climate survey, the nonpartisan Tax Foundation ranked Tennessee 27th and Georgia placed 25th overall in the states' relative tax burdens for business. Tennessee rated 22nd a year ago and had been as favorable at 17th best for business taxes five years ago.
Despite its attractive low tax rates on individuals and lack of any state tax on wages, Tennessee ranked dead last for business in the number and type of property taxes imposed on business.
Business tax climate* Georgia, ranked 25th, up from 29th the previous year* Tennessee ranked 27th, down from 22nd the previous year* Alabama ranked 28th, down from 19th the previous year* The best states, in order, are South Dakota, Alaska, Wyoming, Nevada and Florida* The worst states, in order, are New York, California, New Jersey, Connecticut and OhioSource: Tax Foundation, 2011 State Business Tax Climate
"The main causes for the drop in Tennessee's rating this year were the increases in property tax collections for business and the state's relatively high rate of sales taxes for many businesses," said Dr. Kail Padgitt, the Tax Foundation economist who authored the study. "Not having a wage tax is seen as a very positive part of Tennessee's tax system, but that is balanced out by having higher sales and other taxes and fees."
Tennessee has increasingly turned to tax exemptions and incentives to offset its relatively higher business taxes in some sectors. That helped lure three $1 billion-plus investments in as many years to Tennessee from Volkswagen, Hemlock Semi-Conductor and Wacker Chemie.
The state offers job tax credits worth up to $5,000 for every job created at a major industry, while local governments frequently use industrial development boards to grant property tax exemptions or deferrals to new or expanding businesses.
"We've probably hit more grand slams than any state and I don't know how you can argue with that success," said Deborah Woolley, president of the Tennessee Chamber of Commerce and Industry, the state's primary business advocacy group.
But Dr. Padgitt said the Tax Foundation advocates a "broad base, low rate" approach even though that is contrary to the efforts of state economic development departments to offer short-term tax abatements, exemptions and other give-aways for prospective employers.
"The temptation is for state lawmakers to lure high-profile companies with packages of tax bonuses, but that strategy often backfires if the company does not prosper," he said.
The Tax Foundation study said research indicates the worst state tax codes tend to be complex and above-average without exemptions for business-to-business purchases.
Dick Williams, chairman of the pro income tax group Tennesseans for Fair Taxation, said the Tax Foundation study underscores the need for Tennessee to adopt a personal income tax to better balance its tax burdens on income, spending and property.
"I know that the conventional wisdom and what most of the candidates are saying on the campaign trail is that an income tax in Tennessee would be bad for business," Williams said. "But if we restructure our system to use a modest income tax to allow us to cut sales and other tax rates, that would be fairer for Tennessee families and help our businesses as well as give us the money we need to meet the needs of our state in the future."
The state of Georgia, which does have a personal income tax, improved its business tax climate in the latest Tax Foundation study moving up to the midpoint among the 50 states, compared with its 29th place showing the previous year.
Contact Dave Flessner at 757-6340 or dflessner@timesfreepress.com