(The Center Square) – Although Washington taxes capital gains, the state is one of just a handful without a true income tax. Despite this benefit, an analysis of business tax friendliness has the Evergreen State in hostile territory.
The Tax Foundation’s deep dive into state tax laws and how they interact with businesses ranks Washington 35th in their 2024 State Business Tax Climate Index, released Tuesday. The low-tier status represents a continued annual slide from ranking 15th in 2022, when its capital gains tax took effect.
The nonprofit notes that businesses pay close attention to the burden that state and local governments place on them, and they often act based on those factors. Major capital investments were delayed in 2007 when Illinois Gov. Rod Blagojevich imposed a significant gross receipts tax on sales over $1 million, only to resume when the state Legislature rolled it back. The authors cite Intel’s 2005 decision to expand in Arizona rather than California.
The nonprofit gives outsized weight to personal income tax rates. Other states without an income tax – Alaska, Florida, South Dakota, Tennessee, Texas and Wyoming – rank 15th or higher.
Where Washington received high marks for its personal income tax, the Tax Foundation graded the state poorly in most other aspects. At $67,600, Washington has the nation’s highest taxable wage base.
The state is the only one that applies gross receipts taxes to S corporations and limited liability companies. It does so at industry-specific rates via a Business and Occupation tax. It’s also one of six states that don’t allow full deductions for either the cost of goods sold or employee compensation.
The state is also one of only a handful that taxes many business inputs such as utilities, services and leases at relatively high rates.
Local sales taxes are high in Washington. The report said Washington’s 9.4% combined state and average local sales taxes are only higher in three states. Residents of the border city of Vancouver have made a popular habit of shopping across the Columbia River in Oregon, where there is no general state sales tax.
