Enterprising States 2013 Report: Top Performers in Business Climate

May 13, 2013

This article is part of a series on Enterprising States, a study produced by the U.S. Chamber of Commerce Foundation. The study, along with a accompanying Enterprising States Dashboard, was released at the U.S. Chamber's annual America’s Small Business Summit, April 29, 2013. This post was originally posted on Free Enterprise

Government-imposed or government-related costs can have a major influence over the incentives and resources that are available for starting, operating, or expanding a business.  Like large businesses, small businesses are negatively affected by exorbitantly high taxes, energy costs, volatile markets, lack of access to capital, expensive regulations, and problematic legal environments. Higher top marginal tax rates on personal income, for example, have been found to reduce a state’s share of the national entrepreneurial stock.

However, small businesses lack the political muscle of their large business counterparts in dealing with state and local government, and they are more likely to suffer from the unfavorable effects of high taxes, conflicting and complex rules, or a burdensome legal system. Most small businesses cannot afford a team of lawyers and consultants to help them navigate the maze of government red tape.

Underfunded state and local pension programs threaten to undermine the business climate in many states by diverting resources from critical basic services. Estimates of unfunded pension liabilities range from $730 billion to $4.4 trillion, and the funding ratio for state plans dropped from 77% in 2011 to 73% in 2012. The situation varies among states; for example, North Carolina and Florida are in relatively good shape, while Illinois and New Jersey are in trouble.

No state has the best tax policy for all entrepreneurs; rather, different states have tax policies that suit certain types of companies more than others. Thus, the states that are best for new businesses are not always the most favorable for existing small businesses. Those that are best for new C corporations aren’t best for new sole proprietorships, partnerships, or S corps. Likewise, the most advantageous states for starting service firms aren’t always the best for starting manufacturing ventures. And states that offer the most favorable conditions for R&D-intensive firms are not the most favorable for low-tech businesses.

Many states are enacting commonsense reforms to legal systems in order to help ease the burden of wasteful and excessive civil lawsuits on small business. Small businesses produce just 22% of total U.S. business revenue, yet bear 81% of business tort liability costs. More than a third of small businesses report having been a target for lawsuits and, of those, 73% said the suit negatively affected their business.  Since 2011, nine states have enacted significant legal system reform: Alaska, Arizona, Louisiana, Ohio, Oklahoma, North Carolina, Tennessee, Texas, and Wisconsin.

Six equally weighted metrics determine the top states for business climate:

  • Small business lending rate
  • Potential cost impact of legal reform (Institute for Legal Reform)
  • State and local tax burden (Tax Foundation)
  • Overall business tax climate index (Tax Foundation)
  • U.S. Business Policy Index (Council for Small Business and Entrepreneurship)
  • Cost of living

 

The following states are the top 10 performers overall in economic performance and growth for 2012:

  1. South Dakota. South Dakota leads the way in business climate, with four top 10 rankings and no worse than 26th in any measure. Top rankings include 1st in the U.S Business Policy Index, 2nd in state and local tax burden, 2nd in business tax climate, and tied for 8th for its cost-effective legal environment.
  2. Nevada. Nevada ranks 2nd in the U.S. Business Policy Index, 3rd in business tax environment, 6th in small business lending, and 9th in state and local tax burden. The state has no corporate or personal income taxes, no inventory tax, and no inheritance tax, easing generational transition of family-run small businesses.
  3. Wyoming. Wyoming’s three top five rankings in business climate measures place it 3rd overall in this category. According to the Tax Foundation, the state has the best business tax climate in the nation, and its overall state and local tax burden is 5th. Wyoming ranks 4th in the U.S. Business Policy Index and 16th for its cost-effective legal environment.
  4. Alaska. Alaska has the lowest state and local tax burden in the nation, the 4th best business tax climate, the 7th most cost-effective legal environment, and the 4th most active small business lending climate. Looking to spur new growth in the critical energy sector, Alaska policymakers are weighing adoption of a range of policy changes designed to drive increased exploration and production.
  5. Texas. The Lone Star State is a strong overall performer in business climate, ranking in the top nine in four business climate measures and no worse than 22nd in any. Texas is a low-tax state, ranking 9th in business tax climate and 6th in overall state and local tax burden. Americans are moving to Texas from all over the country, attracted partly by the state’s 7th-lowest cost of living.
  6. Utah. Utah ranks between 7th and 22nd in all six business climate measures, including 7th in small business lending activity and tied for 8th in both cost-effective legal environment and the U.S. Business Policy Index. Utah is home to comparatively low top corporate tax rates at 5% and is one of the lowest property tax states in the nation relative to income. Additionally, Utah lacks wealth transfer taxes such as the gift tax, and the estate and inheritance taxes on the books are currently not operational.
  7. Arizona. Arizona has an active small business lending environment, ranking 3rd overall. Arizona also augments startup funding with its Angel Investment and AZ Fast Grant programs. The Angel Investment program offers tax credits to investors who make business investments in qualified Arizona small businesses, while the Fast Grant program helps small companies with promising technologies through the commercialization process.
  8. Colorado. Colorado ranks 8th overall, led by a 1st-place ranking in small business lending activity. A series of “Pits and Peeves” meetings gathered information about regulatory barriers to job creation. Working with business leaders and other stakeholders, the state reviewed thousands of its rules and regulations, identifying potential reforms to streamline regulatory processes and eliminate barriers to business success in Colorado.
  9. Florida. Florida ranks 5th in business tax climate and the U.S. Business Policy index and 8th in small business lending activity. Florida recently increased its corporate income tax exemption from $5,000 to $50,000 and adopted legislation making it easier for growing manufacturing businesses to qualify for sales tax exemptions on equipment purchases.
  10. Idaho. Idaho makes the top 10 with the 5th most active small business lending environment, 9th-lowest cost of living, and 12th most cost-effective legal environment. A recent survey of small business owners by Thumbtack.com and Kauffman Foundation gave Idaho an A+ rating for business climate.