State Tax Competitiveness: Your Guide to Economic “Wins Above Replacement” 40

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The annual State Tax Competitiveness Index is a crucial diagnostic tool that measures the structure of state tax codes across more than 150 variables. Unlike most tax studies that focus on how much revenue a state collects, the Index prioritizes how that revenue is collected, recognizing that a better-designed tax structure is key to economic health.

Tax Structure as “Wins Above Replacement” (WAR)

The impact of a state’s tax structure is similar to the “Wins Above Replacement” (WAR) statistic in baseball.

A great tax code won’t magically turn a quiet basin into a thriving metropolis, nor will a bad one turn Manhattan into a ghost town. However, a simple, neutral, transparent, and pro-growth tax structure provides an economic advantage—it gives a state “wins” over what a “replacement-level” tax code would generate.

Taxes are only one factor in location decisions (along with workforce quality, markets, and quality of life), but they are one of the few factors that policymakers can directly control. Even if a state needs to hit a specific revenue target, there are always better and worse ways to raise that money.

How the Index is Calculated

The Index scores states across five primary components of their tax codes. The weight of each component is determined by the amount of variance in tax structures across the states, giving more weight to areas where states have greater differences (and thus more room to compete).

The five Sub-Indexes are:

  1. Corporate Taxes
  2. Individual Income Taxes
  3. Sales and Excise Taxes
  4. Property and Wealth Taxes
  5. Unemployment Insurance Taxes

The Top Scorers: Zero Taxes Equal Perfect Score

States that bank the highest, such as Wyoming and South Dakota, typically do so by completely foregoing one or more major tax types (like the individual income tax). By not imposing a tax, they automatically score perfectly in that sub-index.

This “Wyoming Model” isn’t feasible for every state. States without income or sales taxes must:

  • Lean heavily on the remaining major tax types (which may lower their rankings in those categories).
  • Operate on leaner budgets.
  • Take advantage of natural resources (like oil and gas).
  • Benefit from favorable demographics to generate revenue through other taxes (like Florida).

The Reform Models: Competing with All Taxes

More instructive for most states are the models used by the states that rank slightly lower, from 10th to 16th—states like Idaho, Indiana, North Dakota, Missouri, North Carolina, Arizona, and Utah.

These states impose all the major taxes but achieve high scores by maintaining moderate rates and implementing well-designed tax structures. Many of these states have substantially modernized their tax codes over the past two decades:

State Key Reform Period Noteworthy Reforms
Utah Starting 2006 Began structural reforms and modernization.
Indiana Starting 2011 Implemented significant tax code updates.
North Carolina Starting 2013 Enacted a string of comprehensive, pro-growth reforms.
Arizona 2013, 2022 Substantial tax modernizations and rate cuts.
Idaho Starting 2022 Began focused reforms and reductions.
North Dakota 2023 Implemented recent tax structure changes.
Missouri Recent Years Series of rate cuts and reforms, including capital gains tax repeal (2025).

A Diagnostic Tool for Policy Improvement

For the average taxpayer, the Index is a valuable reference point for seeing where their state stands.

For policymakers, however, it is an indispensable diagnostic tool. The detailed tables allow them to compare their state’s code to others on highly specific structural issues, such as:

  • The presence of corporate “throwback” rules.
  • The treatment of net operating losses.
  • Whether income tax brackets are indexed for inflation.
  • Whether the state authorizes split-roll property taxation (different tax rates for different types of property).

By focusing on structure, the Index helps states understand how to modernize their tax codes to encourage economic growth. States that rank better on the Index have better-structured tax codes, and states with better-structured tax codes get “Wins Above Replacement.”

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