Sept. 22 (Bloomberg) -- New Jersey and New York are the worst of the 50 U.S. states for business because of their tax burdens, a study by the Tax Foundation says.

The two ranked 50th and 49th respectively in the analysis of state personal, corporate, sales, property and unemployment- insurance taxes in the year that ended June 30. The study, released today by the Washington, D.C.-based institute, said South Dakota and Wyoming, which have no corporate or individual income taxes, have the best business climates.

As tax receipts fell in the economic recession, U.S. states faced a combined $165 billion shortage in revenue for the fiscal year that started for most on July 1. New Jersey and New York boosted personal tax rates to help close their gaps.

New York’s new top rate of 8.97 percent “is more than 30 percent higher than its previous top marginal tax rate,” said Kail Padgitt, an economist who led the study. “The state-local combined rate is the highest in the nation” because New York City also raised personal income taxes, he said.

States that scored the best in the 2010 State Business Tax Climate Index lacked one or more of the five major taxes, Padgitt said. States with all five of the taxes can still score high, he said, such as No. 10 Utah.

“The key is to maintain low rates by taxing broad bases,” Padgitt said. Incentives that “carve out” tax privileges to lure businesses don’t increase a state’s long-term competitiveness, he said.

“These are often attempts to cure an overall problem with the tax structure,” Padgitt said on a conference call with reporters.

Impediment

New Jersey’s corporate income tax is an impediment to business because of its low threshold -- $100,000 -- and because the state doesn’t index corporate brackets for inflation, according to the study.

New Jersey was also among states that enacted “disproportionately high” tax rates on personal income, the study found. Maryland was first to move in that direction in 2007 with a new top rate of 6.35 percent on couples with incomes over $1 million, the study reported.

“Since then, a number of states have enacted similar taxes, though often on income far less than a million dollars,” the study said, citing New Jersey, Hawaii and Oregon.

Property taxes also pulled down the rankings of New Jersey and New York. Residents of New York’s Westchester and Nassau counties, outside New York City, paid the highest property tax bills in 2008, a separate study by the Tax Foundation, released today, showed. New Jersey’s Hunterdon and Bergen counties were next.

Property Taxes

Westchester had the biggest median property tax bill on the U.S. list, at $8,890, the study said. Hunterdon residents paid $8,492.

Among the states, New Jersey ranked first with a $6,320 median property tax bill, said the study, based on U.S. Census Bureau data. States with the lowest median real-estate taxes were Louisiana, $188; Alabama, $383, and West Virginia, $457.

“States with the best tax systems will be the most competitive in attracting new businesses,” Padgitt said in his report. “Companies will locate where they have the greatest competitive advantage.”

To contact the reporter on this story: Jerry Hart in Miami at jhart@bloomberg.net.

Last Updated: September 22, 2009 16:41 EDT