Overall, Delaware has the 14th best 2015 business tax climate according to the Tax Foundation. Even more important, as jobs are far more likely to move between contiguous states, Delaware’s tax climate is far better than surrounding states in the region (see the tabe available in the download link below).
Delaware’s high ranking is due primarily to the absence of a sales tax and consistently low property taxes. Compared to sales tax rates of 6% in Maryland and Pennsylvania and 7% in New Jersey, the appearance of a rate of 0% in Delaware attracts out-of-state shoppers.
The absence of a sales tax is a sleight of hand since Delaware is one of the only five states in the nation that levies a gross receipts tax. The tax is applied to total receipts with no deductions for labor costs, interest expense or state or federal taxes.
While the Tax Foundation makes a minor adjustment to its corporate income tax rating to account for Delaware's gross receipts tax, conversion to an effective sales tax would drop the state's business tax climate ranking to the middle of the pack.
The most recent effective property tax rate—property taxes paid as a percentage of the value of owner occupied housing—is 0.55% in Delaware. This compares to 1.10% for Maryland, 2.38% for New Jersey, and 2.54% for Pennsylvania.
Delaware also has a cap on capital stock property tax payments. Business location decisions are especially sensitive to property taxes as the amount paid is unrelated to profits.
On the downside Delaware ranks 50th in corporate income taxes. This is due primarily to the state's high corporate income tax rate of 8.7%, which results in Delaware ranking 4th among the states in corporate income tax collections per capita.
Delaware ranks 33rd in individual income taxes.Delaware’s income tax rank deteriorated with the post recession increase of the tax rate on households with income over $60,000 to 6.95%. After a slight roll back, the rate currently stands at 6.6%.
This exceeds the flat income tax rate in Pennsylvania of 3.07% and the highest rate of 5.75% in Maryland. The tax rate in New Jersey for income between $75,000 and $500,000 is 6.37%. Since the income tax is given a weight of one-third in overall tax climate index, Delaware has gone from a ranking of 8th in 2010 to 14th today.
Studies have found that the Tax Foundation business climate index consistently explains economic growth. Holding the line against further tax increases will help maintain Delaware’s business tax advantage. Economic growth in Delaware, however, continues to be held back by low quality public education, high electric rates and lack of paycheck protection.
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