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May 20, 2019

Which State Has The Highest Tax Rates For Pass-Through Businesses?

In a report released last week, the nonpartisan, nonprofit Tax Foundation examines state marginal tax rates for pass-through businesses – businesses like sole proprietorships, S corporations, and partnerships that “pass” their income “through” to their owner’s income tax returns and pay the ordinary individual income tax.

These types of businesses made up at least half of each state’s private sector workforce in 2016. Hawaii has the lowest percentage of pass-though companies (50.7 percent) while Montana has the highest (70 percent).

The Tax Foundation found state and federal marginal tax rates for pass-throughs vary widely. Seven states have a low combined marginal rate of 32.7 percent while California taxes these businesses up to 46.1 percent. Of course, one factor driving the variation “is the extent to which states tax individual income, since pass-through businesses pay taxes under the ordinary individual income tax.” California has a high individual income tax rates while the states with some of the lowest marginal pass-through rates – Alaska, Florida, South Dakota and Texas – have low or no individual income taxes.

Read the full report here.