Last month, the Tax Foundation released its 2023 State Business Tax Climate Index, in which Washington slipped dramatically to No. 28 from No. 15 the year prior. The State Business Tax Climate Index compares state tax structures.

Here is how the index ranks Washington:

• Corporate Taxes: 37 (+0)
• Individual Taxes: 8 (-1)
• Sales Taxes: 49 (+0)
• Property Taxes: 22 (-1)
• Unemployment Insurance Taxes: 25 (+0) 

Washington had the largest drop in overall tax structure ranking by a wide margin (the second largest fall was Georgia with a change of -3). 

The introduction of the capital gains tax is the main reason for Washington’s steep decline. The Tax Foundation explains, “Washington, with its unenviably aggressive gross receipts tax and high-rate sales tax, has always been buoyed on the Index by forgoing an income tax.” The capital gains tax erased that counterbalance.

A share of Washington’s drop in the Foundation’s Index can be attributed to the weight that individual income taxes hold in their methodology. Here is a breakdown of the weighting of their five major components of their indexing: 

• 30.6% — Individual Income Tax 
• 23.5% — Sales Tax
• 21.5% — Corporate Tax
• 15.0% — Property Tax

Below are the top ten states, followed by an explanation for their ranking:

The 10 best states in this year’s Index are: Wyoming, South Dakota, Alaska, Florida, Montana, New Hampshire, Nevada, Utah, Indiana, North Carolina. The absence of a major tax is a common factor among many of the top 10 states. … Nevada, South Dakota, and Wyoming have no corporate or individual income tax (though Nevada imposes gross receipts taxes); Alaska has no individual income or state-level sales tax; Florida has no individual income tax; and New Hampshire and Montana have no sales tax.

Washington’s tax structure could look much different next year after the Douglas County Superior Court ruled the capital gains tax unconstitutional in March. The state Supreme Court is set to hear the case in January of 2023 following an appeal from the attorney general (ironically arguing that the capital gains tax is an excise tax rather than income tax). 

Read our Policy Brief regarding state and local business tax collections for FY2020 for more information on Washington’s tax structure relative to other states.  

Jack is a WRC intern.