Two new reports from the D.C.-based Tax Foundation should cause some concern in the ranks of economic development officials in this state. Washington fell out of the top ten for "Best Business Tax States." In FY 2010, Washington ranked 9th and for FY 2011 we slipped two places to 11th. It's not a huge drop-off compared to a few other poorly-performing states, but it does raise concerns as we head into a budget-writing legislative session with a projected $4.5 billion budget shortfall. 

The top ten states with the best business tax climate were, in order from one to ten, South Dakota, Alaska, Wyoming, Nevada, Florida, Montana, New Hampshire, Delaware, Utah, and Indiana. The bottom states, from 41st to 50th (worst) are as follows: North Carolina, Rhode Island, Minnesota, Maryland, Iowa, Ohio, Connecticut, New Jersey, California, and New York. 

The Tax Foundation's "2011 State Business Tax Climate Index" puts Washington at 11th overall but breaks down individual tax components thusly:

Washington ranks 

• 11th overall
• 32nd in Corporate Tax Index
• 1st in Individual Income Tax Index
• 50th in Sales Tax Index
• 25th in Unemployment Insurance Tax Index
• 19th in Property Tax Index

Texas, whose governor set off a public relations firestorm last week when he issued a letter to a few top businesses to relocate to his state if I-1098 passes, ranks just below Washington at 13th overall.

The Texas love letter to businesses is a good seque to another report that came out this week from the Tax Foundation, which warns if Initiative 1098 passes, Washington will see a precipitous drop in the Business Tax Climate Index.

The drop in the ranking would be so drastic that the report warns:

"Washington State scores well in the Index, routinely in the top 15 of states. Key to this high ranking has been the absence of a major tax, which also means the absence of the associated compliance burden, administrative cost, and deadweight loss to the economy. The economic benefit of being one of the seven states that do not tax income in many ways counters Washington's continued use of an economically destructive gross receipts tax (the B&O tax).

In the 2011 State Business Tax Climate Index, Washington scores as the 11th best business tax climate, as of the snapshot date of July 1, 2010. If the provisions of Initiative 1098 had been in effect on that date, the added costs associated with an entirely new tax, and the way it is structured, Washington would have scored 48th. This is a serious sign that the tax change would negatively affect Washington's state business tax climate." (emphasis added)

These two Tax Foundation studies bring a serious warning to policymakers considering new business taxes or voters thinking about implementing the state's first income tax -- do so at the peril of worsening our state's business tax ranking and lowering prospects for business relocation to this state.