State Tax Rates Vary Widely

The gap between the US state with the top state and local taxes and the bottom is 5% of income according to a new report from the Tax Foundation.  For an entrepreneur, such a gap can mean the difference between success and failure. 

A start-up is a race between cash burn and breakeven.  Higher tax rates mean a longer run to breakeven.  A longer run to breakeven means more cash needed to launch the venture.   Higher tax rates also means the entrepreneur earns lower returns on both cash investment in the deal and on sweat equity required to get to breakeven.

The Tax Foundation report finds that the nation as a whole paid 9.7% of its income in state-local taxes in 2008. New Jersey residents paid 11.8%, topping the charts. New Yorkers were close behind, paying 11.7%, and Connecticut was third at 11.1%. The top ten were rounded out by Maryland (10.8%), Hawaii (10.6%), California (10.5%), Ohio (10.4%), Vermont (10.3%), Wisconsin (10.2%) and Rhode Island (10.2%). Alaskans pay the least, 6.4 percent in 2008, but Nevada is close at 6.6 percent. In four states the residents pay between 7 and 8 percent of their income in state-local taxes: Wyoming (7.0%), Florida (7.4%), New Hampshire (7.6%) and South Dakota (7.9%). Four other states round out the bottom ten: Tennessee (8.3%), Texas (8.4%), Louisiana (8.4%) and Arizona (8.5%).

States should pay attention to tax rates right now.  Entrepreneurship is tough enough without the state adding to the entrepreneur's costs by taking away a precious percentage points off of profit margins through higher taxes. Five percent extra costs in the heavily taxes states can be the difference between surviving to breakeven or not; to making the decision to pull the trigger and launch a new business or to sit on the sidelines.