By now, you are familiar with the backbone metaphor. As in: "Small businesses are the backbone of our economy. We must do everything we can'¦to make sure they succeed." This particular version happened to be uttered by California governor Arnold Schwarzenegger on March 31 of this year to an audience of Hispanic business owners. But pretty much every working politician in the country has offered up a variation of the backbone metaphor recently. This is especially true among governors, who have a natural affinity for entrepreneurs because they too are executives (rather than legislators) and because they are apt to encounter local CEOs in the conduct of their duties.
With most if not all governors espousing entrepreneurship, it's harder than it used to be to figure out who is truly an ally and who isn't. That's why this year, in time for Election Day, we're rating the governors on how their policies have encouraged business ownership. Early on, we narrowed our focus to the 26 governors who are seeking reelection. The thinking here is that it's smarter and fairer to assess someone on the record he or she has built in office than on campaign promises.
Over the course of several months, a team of reporters has talked to dozens of entrepreneurs, academics, policy wonks, economic development officials, National Federation of Independent Business chapter heads, chamber of commerce presidents, venture capitalists, and (yes) governors themselves to get a sense for which governors have offered the most support to their state's business community.
We judged the governors on several criteria: tax and fiscal policy, work force and economic development, health care, education, and regulation. We also took into account a state's business climate: Is the governor riding high on a strong economy or doing his or her best in an unfavorable environment? We awarded bonus points to good cheerleaders and to those who have come up with imaginative pet projects.
So what did we learn? In broad strokes, the best governors for business are the least partisan. They are often Republicans in traditionally liberal states (Vermont, Minnesota) or Democrats in conservative states (Kansas, Oklahoma). They collaborate with legislators and business leaders to reach consensus even on tough questions. As important, they strike the right balance between making progress on a few key issues—such as workers' compensation reform or balancing the budget—and backing a laundry list of smaller initiatives. Finally, they are consistent. When it comes to supporting small businesses, the backbone of the economy, you might say that the true mark of a friendly governor is that, periodically, he or she shows a little spine.
Republican, age 62
Before entering politics, Riley built a door-to-door egg sales operation, Uncle Bob's Eggs, into one of the largest poultry outfits in the Southeast. In office, he's generally supported business interests. He has persuaded Alabama's young auto industry to expand and attracted an Airbus factory to the state. He was also among the first governors to protect small businesses by signing legislation to curb the use of eminent domain.
In 2003, Riley's high-profile effort to get the legislature to raise taxes failed, but a strong economy helped him erase the record $650 million budget deficit he inherited. The state now has a modest surplus.
Riley has distinguished himself by trying to alleviate the abject poverty in some parts of the state, which is ultimately Alabama's biggest economic challenge. His Black Belt Commission seeks to increase school funding in rural black communities. He also gave a tax break to the one in five Alabamans who earn less than $12,500 a year.
Democrat, age 48
Janet Napolitano has been both lucky and smart. Arizona's booming economy has created a $1.5 billion state budget surplus, letting the governor create tax breaks for business while preserving key government services and balancing the budget.
In 2005, Napolitano worked with the legislature to craft several bills that effectively cut property taxes for small businesses and provided them with targeted tax credits. She also signed into law a novel tax credit for angel investors who put money into high-tech and rural small businesses. The 2007 budget, which Napolitano signed in June, includes another $525 million in tax cuts, mostly from a 10 percent across-the-board income tax cut, and the suspension of a new property tax levied by counties to pay for schools. Both moves were favored by the Arizona business community.
The governor has also made progress this year on her health care agenda. She created a one-time $1,000 tax credit for small businesses that purchase health insurance for their employees. Even more important, in April she signed a bill allowing companies with two to 25 workers to buy no-frills health insurance--a priority for the state's small businesses that can't wait for a back-end tax credit, says Michelle Bolton, the head of the state chapter of the National Federation of Independent Business.
In terms of education, Napolitano's signature achievement is an $80 million package, included in the 2007 budget, to provide all-day kindergarten across the state. She also won funding for a new medical school in Phoenix and a pay raise for teachers.
Thanks to the state's relatively low taxes, booming economy, and expanding population, Arizona's business climate could hardly be better. But the big test for the governor, should she win reelection, will be immigration. Napolitano, who once did legal work for pro-immigrant groups, has taken a hard-line stance on illegal immigration as governor, calling for tougher border enforcement and higher penalties for employers who hire undocumented workers. By bashing Washington Republicans over lax border control, she has bolstered her political fortunes at home.
Republican, age 59
Elected: 2003, after a recall
He hasn't been the revelation that some people had hoped for, but the Governator's biggest business-related priority coming into office was reforming the state's onerous workers' compensation system, and he's done it. The new system dictates how doctors and lawyers measure the extent of worker injuries, something that had been subjective in the past. Since the law passed in 2004, businesses have seen their workers' comp costs fall by 40 percent on average, and the state has added 580,000 jobs, second only to Florida. "The importance of his work can't be overstated," says Michael Shaw, of California's NFIB chapter.
M. Jodi Rell
Republican, age 60
Elevated: from lieutenant governor to governor in 2004
Rell is popular, and Connecticut is a rich state, boasting the second highest household income in the country behind New Jersey. In two years in office, she has focused on good government measures such as making state contracting more transparent. This impulse is understandable, given that her predecessor, John Rowland, resigned from office under indictment for corruption. But Rell could be more proactive when it comes to small-business policies, because Connecticut may well find itself at a crossroads in the coming years. The state routinely struggles to balance its budget. Cities such as Hartford and key industries such as manufacturing and insurance are in decline. Housing costs are high, which makes Connecticut an unappealing destination for younger workers. And even with some bright spots, such as the hedge fund industry, job creation is flat.
Republican, age 59
Perdue is generally well liked by Georgia's business community. On his watch, the state streamlined its cumbersome corporate tax structure. Perdue also created tax credits for businesses that hire new workers and for small businesses that purchase capital equipment. And he spread economic development resources at the grassroots level among 22 small communities.
Assuming he is reelected, Perdue's second term could, like Janet Napolitano's (see above), turn on the immigration question. A new law that he championed allows the state to strip companies of government contracts and tax credits in the event they are found to employ undocumented workers. It's the toughest measure of its kind in the country and is disliked by many members of the state's Hispanic population--which is growing at the third-fastest rate of any Hispanic state population in the country--not to mention by employers, some of whom think it targets them unfairly.
Republican, age 53
Scenic it may be, but Hawaii is also the most expensive state to do business in, and not just because it's located far from the mainland. In addition to predictably high gas taxes and utility costs, residents pay 5.67 percent of their total income in sales and excise taxes (the second highest amount in the U.S.), and workers' compensation premiums are, at $3.73 per every $100 in wages paid, the fourth highest in the country. "Our state historically had a poor business reputation," admits Lingle, a former mayor of Maui, who has made providing relief to small businesses a priority.
In the face of a combative Democratic-led legislature, however, few of Lingle's proposals have become law. Most notably, the legislature rebuffed her bid to cut taxes by $285 million--despite a $574 million budget surplus for 2005. She has thus been compelled to advance her agenda through a series of administrative orders. After fruitlessly pushing to reform the workers' comp system, for example, she focused on streamlining the workers' comp hearing process at the agency level. Similarly, she launched an initiative to get state agencies to run new regulations past a review board when the rules affect small businesses, an existing requirement that officials had previously ignored.
Democrat, age 49
Blagojevich has been a leader in terms of health care, extending access to all Illinois children and an increasing number of working adults each year. He did this while keeping a campaign promise to eliminate the state's $5 billion deficit without raising income or sales taxes. Instead, he laid off nearly 13,000 state workers and bought renegotiated loans to pay off pension debt. To foster entrepreneurship, Blagojevich set up 18 centers that provide resources ranging from seed capital to business plan advice. Allegations of patronage and the mishandling of government contracts mar an otherwise impressive record.
Democrat, age 58
During her 2004 State of the State address, Sebelius said, "State government can't create jobs, but it must create a climate in which businesses can flourish." Ask business owners in Kansas and they'll say she has done just that. Riding a wave of popularity that stems from 22 straight months of job growth, Sebelius will probably waltz to a second term.
By all accounts, she's an expert manager. After inheriting a $1.1 billion deficit, Sebelius balanced subsequent budgets without raising taxes. Most famously, she analyzed the pool of government cars and sold 700 deemed extraneous.
She followed that up in 2004 by putting together legis lation that outlined strategies to pump new life into the economy. In practice, this has meant creating statewide entrepreneurship centers, establishing a $500 million, 10-year initiative to foster technology transfer at state universities, instituting an angel investment tax credit, and promoting ethanol and bioscience initiatives.
More recently, Sebelius worked with the legislature to eliminate property taxes on machinery and equipment purchased after July 1, 2006, and to raise the exemption for "low-cost" items from $400 to $1,500. "This law was a direct result of the governor reaching out to small businesses for guidance and asking them what is most important to them," says Hal Hudson, state director of the Kansas chapter of the NFIB.
"Kansas is a very entrepreneurial state, but our governors have traditionally not been all that pro-business; it has managed to do well in spite of itself," says Tom Devlin, founder of the Rent-A-Center retail chain and now the principal at a venture capital firm, Devlin Enterprises. "Sebelius is the first one who realizes the value of entrepreneurs."
Democrat, age 51
Policy wonk John Baldacci has faced a laundry list of intractable problems: an aging population, some of the highest health care costs in the country, an inherited $1.2 billion deficit, and a high tax burden. In 2005, 13.5 percent of a Mainer's income went to state and local taxes, compared with the national average of 10.7 percent. To give a boost to the state's business community--96 percent of which consists of small employers--Baldacci eliminated the tax on business equipment.
He also had the courage to tackle health care. Launched with $53 million in public funds, Baldacci's Dirigo Health plan provides affordable coverage for 10,800 individuals and 2,300 businesses. The state continues to tinker with Dirigo to entice more Mainers to join.
Republican, age 48
Ehrlich is "unapologetically pro-business," according to his official biography. More to the point, he is a big booster of the technology transfer arrangements by which companies commercialize breakthroughs created in state labs. He established tax credits for individuals and companies that invest in early-stage, privately held biotech ventures. He is also a big backer of the state's technology development corporation, TEDCO. Finally, the governor deserves kudos for erasing a $1.8 billion inherited deficit, though in the process he cut funding for higher education by close to $120 million and tuition rose by 40 percent on some campuses.
Democrat, age 47
Michigan has the dubious distinction of being one of only three states to record a net loss of jobs last year--and the only one that couldn't blame its troubles on Hurricane Katrina. In July, Michigan's jobless rate surged to 7 percent. This is bad news for Granholm, who faces a tough reelection bid. Her opponent, Dick DeVos, is an entrepreneur and former Amway and Orlando Magic executive.
Many business groups are lining up behind DeVos, for obvious reasons. Still, a number of Granholm's initiatives are smart. She closed a $4 billion budget deficit by cutting spending. She then invested $2 billion to boost tech transfer. She added entrepreneurship to the curricula in Michigan's grade schools and universities. She created a novel 401(k)-like savings plan for business owners, and put all applications for business permits online. She even successfully lobbied Google to move its AdWords division (and 1,000 jobs) to Ann Arbor.
The big black mark on the governor's record is that she vetoed the legislature's efforts to expedite the repeal of Michigan's grotesque single business tax, which penalizes employers for each additional worker they hire. Granholm's concern that the state had to find a way to cover the $1.9 billion hole created by the early repeal was valid but, even so, the burial of this tax was long overdue. "Entrepreneurs are like weeds," says Mark Clevey, of the Small Business Association of Michigan. "You don't really need to stimulate their growth, you just need to stop pouring weed killer on them." That said, Clevey asserts that, "on balance, she's done better than any other governor I've seen."
Republican, age 45
Minnesota's economy is bustling. The number of new jobs created jumped 2.7 percent from 2005 to 2006, almost double the national average of 1.4 percent. This has helped Pawlenty rack up Minnesota's first budget surplus since 2001. In terms of his small-business policies, he led the largest delegation ever fielded by a U.S. state on a trade mission to China and created tax exemptions for businesses beyond the Twin Cities. He also created the Smart Buy Alliance to help employers pool resources and drive down health insurance costs and approved a state-sponsored website that helps Minnesotans order prescription drugs from Canada. These initiatives, along with the thriving economy, have endeared Pawlenty to business owners. Regrettably, he cut funding for higher education, causing tuition to rise by 33 percent on average at state universities--even though a highly educated population is among the state's chief assets.
Republican, age 58
Elevated: from lieutenant governor to governor in 2005
Heineman has been on the job less than two years, having taken over from Mike Johanns when the latter was named U.S. agriculture secretary in January 2005. Heineman is often called a big-business candidate, but his record as governor is too short to say for sure. The cornerstone of his small-business agenda--which the Nebraska legislature passed in 2005--provided a sales tax refund on small-business equipment purchases, property tax exemptions, and income tax credits, by lowering the qualifying thresholds. To support rural communities, the package created tax incentives for small businesses located in towns of 15,000 or less.
Heineman also won approval this year for a three-year $300 million tax cut, primarily on personal income. His critics carp that Nebraska still has high property and corporate income tax rates for the region. If elected in his own right, Heineman says he will push to repeal the state estate tax and restructure the income tax.
Democrat, age 53
Two years ago, Lynch defeated Craig Benson, a former Inc. 500 CEO, to become governor. This year, he faces Jim Coburn, yet another Inc. 500 alumnus, in his race for reelection. (New Hampshire elects governors every two years.) Lynch is himself a former CEO. He took over the furniture maker Knoll in 1994 and had restored it to profitability by the time he left in 2001.
During Lynch's first term, Boston-area companies have continued to move to the Granite State for the tax rates, the lowest in the country.
Lynch's main achievement has been replacing a three-year-old health plan that resulted in higher premiums for many businesses. "The old law allowed insurers to discriminate [against employers] on the basis of health or geography of their workers," says Lynch. The new system doesn't let insurers consider these factors and limits premium increases to 20 percent per year. The state's entrepreneurs don't seem to mind these price controls.
Lynch also deserves credit for restoring a businesslike approach to the state's politics, which had become fractious in recent years. "Business people like to operate in an environment where people talk straight, and he does," says Dick Ingram, head of the Portsmouth chamber of commerce.
Democrat, age 58
The booming oil industry has allowed Richardson to rack up accomplishments. He has increased state funds for education and health care while backing an income tax cut that will reduce the state rate to 4.9 percent in 2008, a 40 percent drop. He supported and signed a bill that cut in half the state capital gains tax. He also created a venture capital fund out of the state rainy day fund in an effort to recruit VCs. In 2005, VCs invested $88 million in the state, up from $6.6 million in 2003.
Currently, Richardson is pushing an ambitious health care reform package. One new program provides state and federal funds to help small companies and self-employed workers buy health insurance. Another creates insurance pools meant to enable small employers to buy coverage at lower costs.
Finally, whatever the project's ultimate economic impact, one had to admire the brio with which Richardson and Virgin founder Richard Branson unveiled plans to build a spaceport in New Mexico--the splashiest state economic development announcement of the past four years.
Democrat, age 43
In 2003, the year Henry took office, Oklahoma's budget deficit hit $700 million and the unemployment rate ticked up to 5.6 percent. "Now we've got $70 oil and we're rolling in it," says Larkin Warner, an Oklahoma State University economist.
Henry has capitalized on the state's oil-based good fortune by signing numerous tax cut and tax rebate bills. He is also taking steps that will benefit the economy over the long haul, such as directing $256 million to the state's education system. At Henry's instigation, the state also created a program to provide health insurance to workers at small businesses. Enrollment is low so far, but if the plan works, it could serve as the blueprint for a larger effort--something the state needs, given that one in five residents are uninsured.
Democrat, age 65
Driven by a sluggish national economy and steep declines in fishing and forestry, Oregon's unemployment rate hit 8.5 percent the summer after Kulongoski was sworn in. Today, unemployment stands at 5.3 percent and there are other signs that the economy is rebounding. The city of Bend has become a hub of start-up activity as Californians looking for a fresh start move there.
Though Kulongoski, a former labor lawyer, is viewed by many business owners with suspicion, the state has streamlined the building permit process on his watch. He has also expanded a research center to support technology transfer in nanoscience and microtechnology. Similarly, his Oregon Cluster Network supports industry clusters like renewable energy and wood innovation. Just this summer, he orchestrated a special session of the legislature--traditionally a big deal in Oregon--that secured $42 million in funding for public schools, some of which were at the point of shortening the academic year to cut costs.
Democrat, age 62
Back in the '90s, when he served as mayor of Philadelphia, Rendell developed a reputation as the consummate cheerleader. As governor, he's leading cheers again--with an economic agenda that mostly benefits large corporations. In July, Rendell signed legislation reducing taxes on business by $297 million, with most of the savings going to large manufacturers. On the entrepreneurial front, as part of his efforts to remake the state's Rust Belt image, Rendell has invested $40 million in public funds in nanotechnology and has created a $500 million investment pool, named for Jonas Salk and funded with tobacco settlement money, to support biomedical research. He also convinced PNC Financial Services to offer up to $100 million in credit lines to small businesses planning to expand or create new jobs in Pennsylvania. But, just as Rendell was sometimes faulted for being more talk than action in Philadelphia, as governor he has been accused of paying no more than lip service to small business.
Republican, age 63
A former business executive who entered politics only four years ago, Carcieri has loaded up his annual budgets with start-up incentives, funding for incubators, and business loan programs. But the single biggest obstacle to entrepreneurship in Rhode Island is the tax code. Businesses in the Ocean State face some of the highest rates and most complicated requirements in the country. After years of haggling, Car cieri and the Democratic-led general assembly agreed in 2006 on a set of tax reforms that, while not exactly comprehensive, are a good start--including an alternative flat tax that will lower the effective top income tax bracket to 5.5 percent from 9.9 percent over five years.
Carcieri has also made containing health insurance costs a priority, but his proposals seem to change on an annual basis. In 2002, he proposed allowing businesses to join the state's Medicaid supplement, but he has been mum on that idea since taking office. In 2005, he made medical savings accounts a priority. This June, he and the legislature finally agreed to let insurance companies offer cheaper, stripped-down packages to small businesses and the self-employed--though the plan falls far short of other states' efforts.
Republican, age 46
Sanford came into office proposing to contain health care costs and reform workers' compensation. He has been unable to move forward on many of his agenda items because he was busy fighting with the legislature over a major tax cut at a time when Moody's was dropping South Carolina's credit rating. The state senate rejected Sanford's bill several years in a row before passing an alternative bill, a $130 million tax break for small businesses. After initially opposing the second bill, Sanford signed it. He then claimed credit for the measure, which helped him secure the first endorsement in a governor's race from the state NFIB in the organization's history. "Our signature issue has been correcting the disparity in the state between the way small business is taxed and the way corporations are taxed," says Joel Sawyer, Sanford's press secretary.
Also that year, Sanford opposed a plan to pay to extend Medicaid to some 60,000 small-business employees by raising the cigarette tax, a bill that was heavily supported by the South Carolina Small Business Chamber of Commerce.
Republican, age 52
Abortion has dominated the politics of South Dakota during Mike Rounds's tenure. At the same time, the governor has quietly led the state in a number of alternative energy initiatives. In 2003, Rounds pushed through a law that changed the way wind farms are assessed, reducing the tax burden on these projects by 70 percent. The state also invested $265 million to bring four new ethanol processing plants online. Last year, Rounds signed a law making new biodiesel facilities eligible for a 100 percent contractor's excise tax exemption. Agricultural processing equipment used in these facilities is now tax exempt as well. Rounds's other contributions include boosting school funding, working with farmers to minimize the economic damage done by severe droughts, reducing workers' compensation costs, and developing five science research centers tied to South Dakota State University.
Democrat, age 62
Having launched his own health-management firm in 1980, Bredesen is one of the few entrepreneurs among the current governors. Early in his first term, he made fiscal policy a priority. A 2003 budget, marked by deep cuts to state agencies, protected most programs aimed at K through 12 and college education. Tennessee now enjoys a $106 million surplus, and Bredesen's 2007 budget boosts pre-K enrollment and teacher pay.
Like other governors, Bredesen has struggled to address health care reform. In 2005, in the face of mounting costs, he made the controversial decision to drop 170,000 adults from the state's Medi caid supplement program. The following May, Bredesen won passage for a new plan, Cover Tennessee, a voluntary program in which businesses, the state, and employees split the cost for portable health insurance. The state estimates that the plan will enroll 185,000 of the state's uninsured over the next three years; it has won some praise from the small-business community. And because it is not tied to federal matching funds, Bredesen says, the state can deploy resources through the program to meet changing health needs. (A separate plan will insure 67,000 people dropped from the Medicaid program who have acute health needs.)
Taken as a whole, these reforms are more about state finances than helping small businesses. But Cover Tennessee shows that Bredesen recognizes that insuring more Tennesseans is good for entrepreneurs. Even better, he devised his plan in consultation with the state business community. "Small business appreciates Governor Bredesen for his open door and willingness to listen," says Gary Selvy, head of the NFIB's Tennessee chapter.
Republican, age 56
There's a lot to like about Perry. In 2005, he won passage of a law that lets small businesses join pools in order to negotiate lower health insurance rates; he also relaxed state mandates so that employers can purchase no-frills policies. He approved a major overhaul of workers' comp rules, which restricts injured workers to a network of doctors. A test program set up under the law reimburses small businesses for any equipment alterations made in order to let injured workers return to the job early. But Perry's biggest claim to fame is that he managed to balance the Texas budget in the face of a $10 billion shortfall in 2003.
And here's where things get tricky. To balance the books without abandoning a "no new taxes" pledge, Perry latched on to the idea of ending the state's so-called franchise tax exemption. Though certain companies are exempted, the plan effectively raises $400 million a year in taxes from thousands of limited liability partnerships. It's an especially bitter pill for those that rent space and thus do not benefit from the accompanying reduction in the property tax. Groups that represent large corporations were happy with the proposal, while small-business groups opposed it. To overcome this opposition, the governor bundled the tax plan with popular school financing legislation. It will go into effect in stages through 2008.
Republican, age 55
Democrat, age 60
Doyle has put so much effort into painting himself a pro-business Democrat that pundits say his support among labor, a major constituency in the land of Bob LaFollette, is more tepid than it needs to be for him to win reelection.
When he first took office, Doyle invited a number of entrepreneurs to take part in 12 economic roundtables that he held across the state. Since then, he has stuffed his "Grow Wisconsin" economic plan with jobs programs and tax credits for technology companies. He set up 55 facilities across the state to serve business owners and farmers. Finally, Doyle has won funding for stem-cell research at the University of Wisconsin at Madison, which his opponent, Representative Mark Green of Green Bay, would curb.
Despite these advances, Doyle is widely considered one of the most likely incumbents to fall in November. The state's finances are shaky, and Doyle and the legislature routinely squabble. A series of allegations of no-bid contracts landing in the laps of Doyle supporters have alienated voters. The bottom line: It's great that Doyle has been a friend to business, but his missteps in other areas have blunted his overall effectiveness.
Democrat, age 56
Freudenthal and his state have benefited tremendously from the surge in oil prices. Wyoming's surplus topped $2 billion in 2005, thanks to oil industry tax revenue. And jobs are so plentiful that companies go to Michigan to recruit workers.
The boom has allowed Freudenthal to invest in education, which will benefit the economy over the long term. In March the legislature approved his plan to pump $2.1 billion into public schools, money that will make Wyoming one of the top three states in spending per pupil, up from 14th. The legislature also okayed $505 million to hire more teachers.
On the economic development front, the brand-new Wyoming Technology Business Center offers education and mentoring to the state's small-business owners, while the Business Ready Grant and Loan program provides access to working capital.