Report Card On The States

Ten states are great homes for small companies; five states aren't.

By Kuldarshan Padda | 
 

Ask any small businessman which state has the best business climate, and you can bet he'll give his home state as the answer. At a different time, ask the same businessman which state has the worst business climate, and you can bet he'll give you his home state as the answer.

To bring some objectivity to the process of analyzing the business climate in each of the 50 states, INC. researched over 50 factors in six areas of doing business: tax burdens, labor, capital resources, official commitment to small business, energy costs, and quality of life. We have ranked the top 10 states in each of the six areas: The rankings and an explanation of the factors involved in each ranking begin on page 92.

In addition, INC. decided to give each state a report card based on the combination of five of the individual rankings (excluding quality of life, which is so subjective). We've assigned each state a letter grade, from A through F, and published each report card in the table on pages 96 and 97.The results (10 A's, 18 B's, 11 C's, 6 D's, and 5 F's) are often surprising. You wouldn't think, for instance, of North Dakota and Idaho as states rating an A for small business climate. Both follow much the same formula for getting that grade: very high rates of small business activity (number of small companies per 1,000 population), excellent labor conditions, and light tax burdens. Both states share the same failings: weak official commitment to small business on state programs and limited capital available to home-state businesses. Idaho, in particular, gets good grades for its lower energy costs.

Minnesota has a fairly heavy tax burden, but gets an A for its efforts to attract high-technology companies. The state is one of the top five in its official sensitivity to the needs of small business, and offers a large pool of capital to its entrepreneurs. Colorado gets an A from its above-average labor climate, its light tax burden, and a positive ranking in the cost of energy.

Both Arizona and California get an A because of their governments' respective commitments to helping out small business. Beyond that similarity, the two states diverge: Arizona has a light tax burden, low energy costs, and a good labor situation, although it doesn't offer entrepreneurs much in the way of capital resources. California, on the other hand, has the second largest pool of venture capital, but is seriously weakened by high taxes and high labor costs.

While no state in the Northeast earned an A, four southern states came out tops: Texas, Mississippi, Alabama, and North Carolina. If any state could be pegged as Number 1 overall as a place to run a small company, Texas would be the one. (We wanted to avoid ranking the states' overall climates because the decision about where to do business is so complex that it grossly oversimplifies the problem to say that one state is the best place for all small businesses.) Texas made the top 10 in labor, taxes, and capital resources: more top rankings than any other state. Though Alabama is hurt by its labor climate, the state shows exceptional performance in capital resources. Mississippi is helped out by its capital resources, primarily distributed through Industrial Revenue Bonds. And North Carolina gets particularly good grades for its labor pool and a low tax burden.

The second tier of states, those that got a B, include most of the industrial states in the country. New York and Massachusetts, for example, have enormous pools of capital for small business people, but also suffer from high taxes and energy costs. Arkansas, on the other hand, offers the fifth-best tax structure and reasonable energy costs, but has little capital. And Maine has an above-average small business activity rate, inexpensive labor, and insignificant cooling costs, but its economy is one of the most depressed in the country.

Pennsylvania and Illinois both got C grades, surprisingly. Those Philadelphia banks help their state get a top-10 ranking in capital resources, but the state is hurt by high taxes, high energy costs, a poor labor picture, and an abysmal rate of small business activity. Illinois, on the other hand, has a surprisingly strong commitment to small business through government programs and a fair amount of capital, but is hurt by its labor and energy costs.

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