In its Business Tax Index 2009: Best to Worst State Tax Systems for Entrepreneurship and Small Business, the Small Business and Entrepreneurship Council (SBE Council) examined the tax systems of all fifty states plus the District of Columbia. Their goal was to determine which states offered the best and worst tax environments for small businesses. Their method was to look at sixteen tax measures such as income tax, consumption taxes, inheritance taxes and so on, and then combine them into a single score.

According to the report author, Raymond J. Keating, Chief Economist for the SBE Council, “Taxes shift resources away from the private sector, distort economic activity, and restrain economic growth. Without a doubt, taxes hit the bottom lines of entrepreneurs, investors and small businesses.” He also said that, “At the state and local levels, taxes have been piling up on small business owners. Many of states and localities continue to increase levies in various ways, including income, property, sales, assorted excise, gross receipts, and death taxes, along with a wide array of fees.”

The issue for Keating is that each of these different taxes affects economic decision-making in distinct ways. He explains that income taxes impact incentives for working, investing and entrepreneurship; property taxes affect decisions regarding investments in buildings and housing; and consumption taxes divert and reduce consumer purchases.

The tax environment is a key deciding factor in the placement of a business. As with most other things in life, you want to find the best deal. The following is the ranking that the SBE Council came up with. It begins with the state with the best tax system and continues down the list to the one with the worst.

1 South Dakota
2 Nevada
3 Wyoming
4 Washington
5 Texas
6 Florida
7 Alaska
8 Colorado
9 Alabama
10 Ohio
11 South Carolina
12 Mississippi
13 Tennessee
14 Missouri
15 Oklahoma
16 Virginia
17 Arizona
18 Illinois
19 Georgia
20 Michigan
21 Delaware
22 Indiana
23 Arkansas
24 Utah
25 New Hampshire
26 Louisiana
27 New Mexico
28 Kentucky
29 Pennsylvania
30 Connecticut
31 Montana
32 Wisconsin
33 Kansas
34 Oregon
35 Maryland
36 North Dakota
37 Hawaii
38 North Carolina
39 West Virginia
40 Nebraska
41 Idaho
42 Massachusetts
43 Vermont
44 Rhode Island
45 Iowa
46 New York
47 California
48 Maine
49 Minnesota
50 New Jersey
51 Dist. of Columbia

Download the full SBE Council report, look at the 16 types of taxation that were examined and went into the ranking, and learn more about the effect that local and state taxes have on your bottom line.