Indiana ranked 10th nationally in business tax climate, giving the Lone Star State a big Texas-sized boot out of the top 10 for the first time, according to a new report.
For the last decade, the Washington D.C.-based Tax Foundation ranked the business climates of all 50 states after looking at corporate, individual income, sales, unemployment insurance and property taxes. Indiana cracked the top 10 for the first time this year, said economist Scott Drenkard, one of the authors of the study.
Indiana moved up one spot after being ranked 11th in 2012, while Illinois dropped from 28th last year to 31st this year.
"Illinois and Indiana have been moving in opposite directions in business tax climate over the last three years," Drenkard said. "There's a sharp contrast."
The difference in tax bills has been driving Illinois companies, particularly in south Cook County, across the border to Indiana.
Land O'Frost is moving its corporate headquarters from Lansing to Munster. Modern Forge is relocating a factory from Blue Island to Merrillville. RACO is departing South Holland and heading to South Bend.
Illinois has a corporate tax rate of 9.5 percent, while Indiana's current corporate tax rate is 7.5 percent and will be reduced to 6.5 percent by July 1, 2015.
Indiana moved up in the rankings because of the drop in the corporate tax rate, the elimination of the inheritance tax and its already low individual income tax of 3.4 percent, Drenkard said. The personal tax rate also is supposed to drop by 5 percent by 2017.
"Hoosiers worked hard this year to pass a serious, across-the-board tax reduction that benefits all Hoosiers," said Chase Downham, the state director of Americans for Prosperity, a group that advocates for lower taxes and limited government. "It's nice to see that the Tax Foundation's 2014 State Business Tax Climate Index recognizes how these reforms will attract entrepreneurs and encourage job creation."
Illinois ranked in the middle of the pack partly because its corporate income tax rate is the second-highest in the Midwest, after Iowa, Drenkard said. The recent 66 percent income tax hike and the 46 percent business tax increase have caused the state's score and ranking to slide in the last few years.
The state's unfunded liability also raises questions about whether those tax hikes will be permanent, Drenkard said.