Why Tax Structure Matters More Than Tax Rates: Insights from the State Tax Competitiveness Index
Key Takeaways:
The State Tax Competitiveness Index evaluates how well states structure their tax systems—not just how much they collect.
Tax structure impacts everything from business formation to long-term estate planning strategies.
Maryland, Virginia, and D.C. vary significantly in tax competitiveness, affecting businesses and high-net-worth individuals in key ways.
Understanding your state's tax environment can help you manage risk and position your entity for growth.
Business owners, professionals, and investors should factor in state tax competitiveness when making financial and operational decisions.
Why This Matters to Business Owners and Professionals in the DMV
Taxes are more than a year-end compliance activity—they're a strategic consideration that deeply affects where and how you do business. For LLCs, partnerships, and S-corporations in Maryland, D.C., and Virginia, the state tax structure can either support growth or slow progress. The State Tax Competitiveness Index, published annually by the Tax Foundation, sheds light on which states create the most efficient, transparent, and growth-oriented tax environments.
Unlike rankings based on how much states collect, this Index focuses on how states design their tax systems. That distinction is crucial. A well-structured tax system minimizes economic distortion, enhances predictability, and avoids unfair burdens on certain industries or types of income. Poorly structured tax systems introduce unnecessary complexity and volatility, which could lead to long-term strategic missteps.
Below, we break down what the Index measures, how Maryland, Virginia, and D.C. compare, and what this means for tax planning by business owners, professionals, and high-net-worth individuals across the region.
Understanding the Index: Structure Over Revenue
The State Tax Competitiveness Index evaluates five key areas:
Corporate income tax
Individual income tax
Sales tax
Property tax
Unemployment insurance tax
Each category is scored not just on rate levels but also on structural elements like:
Transparency and simplicity
Equity across sectors and income levels
Stability and predictability over time
Treatment of pass-through entities
Burdens placed on small vs. large enterprises
A well-structured system allows taxpayers to plan with confidence and reduces the compliance burden. That's especially important for multistate businesses, entrepreneurs, and professionals with income from various sources.
Maryland: Complex and Costly for High Earners
Maryland tends to score in the bottom third of the Index. The state features a graduated income tax with high marginal rates that kick in at relatively low thresholds. Local jurisdictions also impose their own rates, compounding the burden.
Maryland's estate tax exemption is lower than the federal threshold, which adds complexity to estate planning for high-net-worth individuals. For example, a family business passed down to the next generation may face unexpected tax obligations unless planning is done well in advance.
Business owners should also be aware that Maryland's corporate tax system doesn't offer many competitive advantages. Combined reporting rules add an additional layer of complexity for companies with operations across state lines.
Implications for You:
LLCs or S-Corps with growing profits may find Maryland less favorable due to high pass-through taxation.
Professionals with income across jurisdictions (Maryland and D.C., for example) face added filing and planning challenges.
Estate planning strategies may need to consider alternate tools, such as irrevocable trusts or out-of-state holding companies.
District of Columbia: Mixed Signals and Regulatory Layers
The District of Columbia ranks 48th out of 51 jurisdictions in the 2026 State Tax Competitiveness Index. D.C.'s 48th place ranking puts it among the worst-performing tax systems. Many of D.C.'s tax structures are weighted down by administrative complexity and regulatory layering.
The corporate income tax rate has improved in recent years, but the city imposes a gross receipts tax on specific businesses—effectively a tax on revenue rather than income. It is narrowly tailored to utility and telecommunications sectors. For most service businesses and real estate investors, the gross receipts tax would not apply—instead, they would face the standard corporate or unincorporated business franchise tax.
From a property tax perspective, D.C. maintains a competitive rate structure, but businesses should be prepared for inconsistent assessments driven by district-specific valuation policies.
Further complicating matters is D.C.'s aggressive use of audits and enforcement tools. Entities operating in multiple jurisdictions should pay special attention to D.C.-based nexus triggers, recordkeeping requirements, and local filing obligations.
Implications for You:
Service businesses or real estate investors based in D.C. should model the impact of gross receipts taxes on profitability.
Professionals with home-based or hybrid work arrangements must assess where income is considered earned.
Multistate operators must manage audit risk and maintain excellent documentation.
Virginia: Stronger Structure, Strategically Competitive
According to the 2026 State Tax Competitiveness Index, Virginia ranks 30th out of 51 jurisdictions (50 states plus D.C.). Virginia's 30th place ranking puts it in the middle tier of tax competitiveness.
Virginia has a graduated (progressive) income tax system, not a flat tax. The state employs four tax brackets with rates of 2%, 3%, 5%, and 5.75% on different income ranges. Virginia's system "resembles a flat tax" because most taxpayers end up in the highest 5.75% bracket due to the relatively low threshold of $17,000 for top rates, this does not make it a flat tax.
For business entities, the tax environment is relatively stable and predictable. Virginia does not impose a franchise tax, and its apportionment formulas tend to favor in-state investment and job creation.
Virginia also benefits from competitive property tax rules and a leaner regulatory structure, which reduces hidden costs and non-compliance risks.
Virginia has no state estate tax (abolished in 2007), so residents only need to plan for federal estate tax exposure, which simplifies planning compared to Maryland's $5 million exemption.
Implications for You:
Startups and expanding businesses may benefit from Virginia's predictable tax environment.
Professionals with variable income sources may find the graduated tax regime with relatively low thresholds beneficial.
Estate planning in Virginia is less likely to be disrupted by unexpected state-level tax triggers.
Strategic Comparisons for Businesses and Individuals
Below is a practical example showing how tax structure—not just rate—can influence major decisions:
Scenario: A consulting firm with $2 million in annual revenue considers where to open a second office.
Maryland: Pass-through income taxed at high individual rates + complex filing across municipal layers.
D.C.: Lower income rates, but gross receipts tax materially reduces take-home profits.
Virginia: Flat rate, no gross receipts tax, fewer deductions required for compliance.
In this case, while D.C. and Maryland may offer proximity to federal clients, the long-run financial health of the firm may be better served by expanding into Virginia.
Another scenario involves estate planning:
A Maryland resident with a $10 million estate faces both federal and Maryland estate taxes, requiring additional layers of planning.
A Virginia resident with the same estate only needs to plan for federal exposure, potentially reducing the cost and complexity of wealth transfer strategies.
Key Business Lessons from the Index
1. Favor Systems that Scale
As your business grows, so will the complexity of your tax exposure. Favor jurisdictions with clear, predictable, and stable tax structures. Virginia, in this case, aligns well with companies aiming for long-term scalability.
2. Watch for Non-Income-Based Tax Traps
Taxes like D.C.'s gross receipts tax or certain Maryland local business taxes operate independently of net income and can hurt profitability regardless of cash flow.
3. Plan Multistate Operations Carefully
If your business or practice operates across state lines, your tax planning must extend beyond federal strategy. Nexus rules, apportionment laws, and local filing thresholds all play into your total exposure.
4. Estate Planning Can't Be a One-Size-Fits-All Effort
State-level estate and inheritance taxes still matter in places like Maryland. Families and business owners should explore trusts, insurance tools, and strategic domicile decisions to mitigate risks during estate planning.
How Thienel Law Can Help
Understanding tax competitiveness isn't just about choosing where to incorporate. It's about aligning your entity structure, contracts, and planning documents with jurisdictions that favor growth—not friction.
At Thienel Law, we help clients across Maryland, Virginia, and D.C. navigate state-specific tax challenges with clarity and confidence. Whether you're starting a new venture, expanding a practice, or planning for future generations, we work with you to simplify compliance while managing risk.
From:
LLC formation
Business transitions and buy/sell agreements
Multistate operating agreements
Advanced estate planning
Tax dispute resolution and audit defense
Our firm draws on decades of regional experience to guide your decisions strategically, not reactively.
If You're Ready to Take the Next Step
State tax competitiveness is not just academic. It impacts your bottom line, your ability to scale, and your personal financial legacy. If you're unsure how this applies to your business or personal situation, we're here to help. Schedule a consultation with Steve Thienel to get advice tailored to your goals.
With thoughtful planning and experienced counsel, you can turn tax complexity into a strategic advantage.