Ever since INC. first started doing the annual Report on the States in 1981, our purpose has been less to rank the 50 states than to aid businesspeople and policymakers in their ongoing efforts to improve the climate for small businesses. And, increasingly, each successive States Report, based on information drawn from federal government data and telephone interviews with state officials, becomes the profile of a nation mobilizing to face that challenge. This year's total scores are an all-time high.

Leading the pack, with 86.4 points (out of a possible 100), is California, which met the challenge head-on with creative and innovative small-business support systems of every kind. And yet the term "winner" also applies to 50th place West Virginia, with a score of 42.1, which allocated a portion of its relatively scant resources toward a new loan-guarantee program for small businesses, and which ranks among the high performers in state support. And some mention must go to South Carolina, which continued last year's record-breaking 31-place climb by moving an additional 5 places this year to #14. The higher scores all across the board reflect the continuing (if uneven) national economic recovery, a condition over which states have little control. But another factor has contributed to a more agreeable climate for small, growing businesses -- every single state now has at least 1 of the 10 small-business support and capital-availability programs that INC. surveys.

There are few surprises among the overall top-ranking performers. California, which leads the capital category for the third consecutive year and now joins the top scorers in state support as well, moves up to #1 from its 1984 stop at #3. In fact, last year's top three states -- Connecticut, Massachusetts, and California -- are still hanging together around the top, albeit in slightly scrambled order, and are joined by Colorado, which moves up to #3, largely on the strength of its new state-support programs. Only Florida, which jumps 19 places to reclaim the #6 position it held two years ago, can be described as having made a leap into the top 10. Its rise is due to a number of factors: its improvements in state support, capital, and particularly in general business activity.

While it would be interesting to report that a given geographical region had either captured or abdicated the top sector of our ranking, it wouldn't be true. This year's top 10 states represent seven different regions -- East Coast, West Coast, Gulf Coast, New England, Middle Atlantic, Midwest, and Rocky Mountain.

The biggest shifts from the 1984 to the 1985 rankings occur not at the top, but at the bottom. Although Utah scored below the median in the capital category, steady improvement across the board allowed it to climb from #45 in 1984 to #19 in 1985. Roughly the same number of steps gained by Utah were lost by Nebraska -- and one needn't search hard to find where the shortfall occurred, or why. If there was any money to be made in farming last year, only the motion picture industry found it. Other states that fell in the overall rankings, hurt by cuts in capital and state-support programs, include Pennsylvania, Michigan, and Louisiana. Pennsylvania and Michigan were hit by declines in basic manufacturing industries, while Louisiana was strapped by drops in oil-related activities.

Capital plays an important role in the ranking (with a maximum of 25 points) because -- as Cyndi Lauper so aptly put it -- "money changes everything." This year, the top 10 states in capital resources are California, Connecticut, Massachusetts, Minnesota, Colorado, New York, Virginia, Alaska, Texas, and Illinois. The category measures levels of industrial and commercial lending, small business investment company (SBIC) activity, and four types of state capital-resources programs (direct loan, loan guarantee, bond guarantee, and venture capital funds).

After last year's blizzard of activity, with 24 states launching a total of 31 new capital-resource programs, this year's report would almost have to look tame by comparison -- and it does. Eleven states added an aggregate of 15 new programs, 7 of which were venture capital funds; 13 states dropped a total of 16 programs, which would seem to be a slight setback. Here, however, the numbers can be deceiving. In a year of shrinking resources, the cancellation of a capital-availability program can signify healthy experimentation, a good-faith effort to allocate limited funds for maximum effect. Witness Utah's discontinuation of its direct-loan program and Georgia's dropping of a bond guarantee, with simultaneous inaugurations of venture capital funds in both states. Impressive commitments to improving the small-business economic environment show up in other states as well. Wyoming, despite its relatively depleted coffers, added a new program this year; Arkansas, its banked resources in not much better shape, added 2; and Indiana, notwithstanding low scores on dollars available at the banks of the Wabash, continues to offer all 4 types of state-provided capital programs.

Like capital, state-support activities are also important in the ranking (25 points), because the ways in which a state does or doesn't get behind its entrepreneurial sector are largely within the state's control and are often paramount in attracting, encouraging, and retaining INC.-size businesses. Scores are based on the presence or absence of a small-business advisory office (within state government), advisory council (comprised of small-business people), ombudsman, legislative committee, statewide conference, and procurement setasides.

The top 10 states in this year's state-support category are Indiana, New York, California, Illinois, Kentucky, Georgia, Massachusetts, Connecticut, Minnesota, and Florida. It isn't difficult to understand why such 1984 top 10 states as oil-soaked Louisiana, or heavily industrial Michigan, Pennsylvania, and Ohio have each dropped at least one state-support program over the past year -- if the spirit is willing but the cash is weak, state program cutting may be unavoidable. Nor did steps backward occur only in the top 10.Out of 13 states offering all six of the surveyed programs last year, only Indiana, New York, and Illinois have kept up the good work.

The labor ranking (20 points) weighs what a state "gets" in terms of productivity (dollar amount added by each employee to the raw value of manufactured goods) and a more sophisticated work force (percent of workers older than 25 who are high school graduates) against what it "pays" in terms of higher wages and extent of unionization.

The top 10 states this year are repeaters from last year, with only a few changes in order: Wyoming, Utah, Nebraska, Hawaii, Kansas, Colorado, Idaho, Vermont, South Dakota, and North Dakota. Wyoming, 48th in the general ranking, once again is in the lead.

As for business activity (20 points) -- measured by changes in population, employment, and personal income; business unit density; and representation of INC. 100 companies -- the top 10 states are New Hampshire, Florida, California, Colorado, Arizona, Massachusetts, Alaska, Georgia, Connecticut, and New Jersey.

The wild fluctuation that characterized this category last year is absent from this year's survey, which shows only one state -- New York -- departing the upper reaches. Despite increases in population and employment, a relatively slow growth rate in personal income broke New York's tenuous hold on top-10 status. Growth in employment and sharply increasing personal income sent Arizona back to the top, a recovery from last year's poor performance in this category.

Taxes count the least in our ranking (10 points), since low taxes don't necessarily coincide with, much less dictate, the most favorable soil for growing a business. "Tax advantages," as an eminent Boston corporate tax attorney once cautioned an audience, "are always the cherry on the sundae; they should never be the sundae itself."

The tax category is a case of opposites: The fewer taxes a state imposes, the higher its score. By that measure, the top 10 states are New Hampshire, Florida, Indiana, Tennessee, Missouri, Arkansas, Texas, Alabama, South Dakota, and Kansas. Of these, the only overall top-10 entry is Florida -- which held the same #2 slot in taxes last year, when its overall position was #25. Moreover, two states -- Missouri and Tennessee -- are in the top 10 in the tax category rank, but in the bottom 20% overall. Another two states -- Minnesota and New York -- are in the top-10 rank overall, but in the bottom 10% in taxes.

Note: This table may be divided, and additional information on a particular entry may appear on more than one screen.

RATING THE STATES

CAPITAL RESOURCES

Comm./ind. SBIC

Bank loans loans finan. per State

Rank/state % assets per capita capita programs n1

Median 57.5% $947 $1.2

1. California 69.1% $1,903 $3.7 DL,LG,BG,VC

2. Connecticut 62.3 1,705 6.4 DL,LG,BG,VC

3. Colorado 60.1 830 2.8 DL,LG,BG,VC

4. Massachusetts 59.0 2,087 4.8 DL,LG,BG,VC

5. Virginia 65.4 1,007 1.2 LG,BG

6. Florida 57.0 816 1.5 -

7. Minnesota 59.3 1,673 3.7 DL,BG,VC

8. New Jersey 57.8 1,190 1.8 DL,LG,BG

9. New York 55.1 5,173 5.1 DL,BG

10. Illinois 57.9 2,406 0.7 DL,LG,BG,VC

11. Indiana 54.3 835 1.2 DL,LG,BG,VC

12. Georgia 57.7 884 1.2 VC

13. North Carolina 59.3 1,124 1.1 VC

14. South Carolina 54.0 459 1.8 DL,LG,BG

15. Arizona 65.6 1,299 0.6 -

16. Delaware 81.3 6,866 0.5 -

17. New Mexico 57.3 792 1.6 DL,LG

18. Texas 61.3 2,435 4.7 -

19. Utah 59.1 864 1.2 VC

20. Hawaii 63.3 1,167 0.2 DL

21. Washington 66.8 1,328 1.1 -

22. New Hampshire 64.0 533 2.1 LG

23. Kansas 52.5 559 0.7 VC

24. Montana 55.7 705 2.9 LG,VC

25. Ohio 57.0 982 0.9 DL,LG,BG,VC

26. South Dakota 77.8 942 0.6 -

27. Rhode Island 57.3 1,620 1.9 LG,BG

28. Idaho 63.2 1,136 0.1 -

29. Louisiana 54.7 1,106 1.3 DL,LG,VC

30. Arkansas 52.9 696 0.8 DL,LG,BG,VC

31. Wisconsin 57.2 697 1.9 DL,LG,BG,VC

32. Vermont 70.6 926 0.4 DL,LG

33. North Dakota 51.6 576 0 LG,BG,

34. Maine 60.7 572 1.3 DL,LG,BG,VC

35. Alaska 62.1 1,694 1.6 DL,LG

36. Kentucky 52.5 815 0.5 DL,LG,BG

37. Alabama 51.2 725 1.9 DL

38. Iowa 49.7 474 0 DL,VC

39.Pennsylvania 59.8 1,749 0.4 DL,LG,VC

40. Michigan 57.8 1,126 1.6 VC

41. Missouri 52.5 835 0.2 DL,LG,BG,VC

42. Mississippi 50.8 581 2.0 DL

43. Oklahoma 55.2 1,280 1.6 DL

44. Nevada 56.7 952 0.8 -

45. Maryland 56.1 982 1.0 DL,LG,BG

46. Tennessee 54.2 836 0.8 -

47. Oregon 60.9 1,139 1.7 DL

48. Wyoming 51.8 613 1.9 LG

49. Nebraska 55.2 509 1.5 -

50. West Virginia 48.0 311 0.0 DL,LG

RATING THE STATES

LABOR

Avg. % h.s. Value added

wkly. % grads. per worker

Rank/state wage union over 25 ($000/yr.)

Median $380.4 23% 68% $37.8

1. California $410.2 27% 74% $39.0

2. Connecticut 404.0 23 71 37.4

3. Colorado 388.6 18 78 34.3

4. Massachusetts 357.7 25 73 33.6

5. Virginia 339.1 15 63 35.8

6. Florida 325.7 12 67 29.1

7. Minnesota 403.3 26 72 37.8

8. New Jersey 402.0 26 68 41.1

9. New York 384.2 39 66 43.6

10. Illinois 402.7 30 65 52.1

11. Indiana 449.9 30 66 43.5

12. Georgia 329.4 15 57 30.2

13. North Carolina 287.4 10 55 30.2

14. South Carolina 306.1 8 54 29.4

15. Arizona 377.8 16 72 29.8

16. Delaware 423.0 25 68 34.2

17. New Mexico 349.6 19 68 29.0

18. Texas 386.4 11 61 46.9

19. Utah 365.5 18 80 35.6

20. Hawaii 310.1 28 73 59.8

21. Washington 448.5 34 77 49.2

22. New Hampshire 336.5 16 72 28.4

23. Kansas 378.8 15 72 42.3

24.Montana 432.3 29 75 62.1

25. Ohio 483.1 31 67 44.4

26. South Dakota 318.7 15 69 33.9

27. Rhode Island 287.5 28 61 29.4

28. Idaho 346.1 18 73 35.5

29. Louisiana 426.6 16 58 70.0

30. Arkansas 301.2 16 55 29.7

31. Wisconsin 426.5 29 70 41.3

32. Vermont 344.9 18 71 34.3

33. North Dakota 307.3 17 67 36.2

34. Maine 340.7 24 69 33.0

35. Alaska 449.4 34 83 80.8

36.Kentucky 379.6 24 52 45.7

37. Alabama 343.6 22 57 32.5

38. Iowa 419.0 22 71 55.2

39. Pennsylvania 381.2 35 65 42.4

40. Michigan 562.5 37 68 38.0

41. Missouri 394.8 28 64 37.8

42. Mississippi 292.3 16 55 31.8

43. Oklahoma 404.9 15 67 41.9

44. Nevada 381.9 24 76 31.4

45.Maryland 404.6 23 67 43.1

46. Tennessee 339.9 19 55 32.5

47. Oregon 421.1 26 75 40.6

48. Wyoming 356.8 19 78 70.8

49. Nebraska 356.9 18 74 43.6

50. West Virginia 405.8 34 57 53.7

TAXES STATE SUPPORT

Per $1,000

personal Small bus.

Rank/state income assistance n2

Median $106

1. California $108 AO,OM,AC,LC,SC,PS

2. Connecticut 104 AO,OM,AC,LC,PS

3.Colorado 98 AO,OM,AC,SC,PS

4. Massachusetts 118 AO,OM,AC,LC,PS

5. Virginia 100 AO,OM,AC,LC,SC

6. Florida 90 AO,OM,LC,SC,PS

7. Minnesota 132 AO,OM,AC,LC,PS

8. New Jersey 112 AO,OM,AC,SC,PS

9. New York 153 AO,OM,AC,LC,SC,PS

10. Illinois 104 AO,OM,AC,LC,SC,PS

11. Indiana 90 AO,OM,AC,LC,SC,PS

12. Georgia 103 AO,OM,AC,LC,PS

13. North Carolina 102 AO,OM,AC,LC,SC

14. South Carolina 105 AO,OM,AC,LC,SC

15. Arizona 108 AO,OM,AC,LC

16. Delaware 109 AO,OM,AC,LC,SC

17. New Mexico 117 AO,OM,AC,SC,PS

18. Texas 93 AO,PS

19. Utah 113 AO,AC,LC,SC

20. Hawaii 129 AO,OM,AC,LC,SC

21. Washington 114 AO,AC,LC,PS

22. New Hampshire 89 OM,LC

23. Kansas 97 AO,OM,AC,SC,PS

24. Montana 126 AO,OM,AC,LC,SC

25. Ohio 103 AO,OM,AC,LC,SC

26. South Dakota 96 AC,SC,PS

27. Rhode Island 120 AO,OM,AC,LC

28. Idaho 99 AO,OM,AC,LC

29. Louisiana 105 AO,OM,SC,PS

30. Arkansas 92 AO,OM,PS

31. Wisconsin 132 AO,OM,AC,PS

32. Vermont 122 AO,OM,AC

33. North Dakota 103 AO,AC,LC,SC,

34. Maine 121 AO,OM,AC

35. Alaska 330 AO,OM

36. Kentucky 101 AO,OM,AC,LC,PS

37. Alabama 94 AO,AC,LC,PS

38. Iowa 109 AO,OM,AC,LC,SC

39. Pennsylvania 107 AO,OM,AC,SC

40. Michigan 125 AO,OM,AC,SC,PS

41. Missouri 92 AO,OM,SC

42. Mississippi 100 AO,OM,AC,SC

43. Oklahoma 103 -

44. Nevada 103 AO,AC

45. Maryland 111 AO,PS

46. Tennessee 91 AO,OM,PS

47. Oregon 119 AC

48. Wyoming 202 OM

49. Nebraska 108 AO

50. West Virginia 112 AO,OM,AC,LC,SC

BUSINESS ACTIVITY

Pop. Employment Pers. inc. Business INC.100

.

% change % gain % change units per companies

Rank/state (1980-84) (1982-84) (1981-83) 1,000 pop. (1979-85)

Median 3.1% 3.3% 16.3% 20 3

1. California 8.3% 5.7% 17.9% 21 97

2. Connecticut 1.5 6.0 18.3 22 11

3. Colorado 10.0 6.9 16.2 23 26

4. Massachusetts 1.1 6.9 19.6 21 22

5. Virginia 5.4 7.6 17.9 18 8

6. Florida 12.6 12.6 20.5 21 13

7. Minnesota 2.1 3.6 18.0 21 27

8. New Jersey 2.0 7.7 18.1 21 26

9. New York 1.0 3.7 16.6 21 49

10. Illinois 0.7 -2.0 14.7 19 5

11. Indiana 0.1 0.8 17.7 18 9

12. Georgia 6.8 11.8 22.5 18 10

13. North Carolina 4.8 7.1 20.4 18 2

14. South Carolina 5.7 6.2 19.7 17 3

15. Arizona 12.3 13.5 22.1 19 3

16.Delaware 3.1 8.3 16.9 20 1

17. New Mexico 9.3 5.8 15.7 19 2

18. Texas 12.4 4.1 15.8 20 52

19. Utah 13.0 7.8 17.2 17 2

20. Hawaii 7.7 1.9 14.7 21 0

21. Washington 5.2 1.8 10.8 21 9

22. New Hampshire 6.1 11.6 21.1 22 2

23. Kansas 3.1 1.1 14.8 23 2

24. Montana 4.7 -0.3 8.8 25 0

25. Ohio -0.4 -1.6 15.3 18 9

26. South Dakota 2.2 3.6 19.9 23 0

27. Rhode Island 1.6 2.7 17.5 22 0

28. Idaho 6.0 -0.7 15.7 20 1

29. Louisiana 6.1 -2.1 9.9 18 2

30. Arkansas 2.7 5.7 17.4 18 0

31. Wisconsin 1.3 0.9 14.7 20 4

32. Vermont 3.6 5.1 14.5 25 0

33. North Dakota 5.2 1.3 17.1 24 0

34. Maine 2.8 6.3 17.1 20 1

35. Alaska 24.4 20.9 14.4 21 1

36. Kentucky 1.7 0.8 15.0 17 2

37. Alabama 2.5 2.7 16.4 16 3

38. Iowa -0.1 -2.4 13.8 23 2

39.Pennsylvania 0.3 -1.7 13.0 18 8

40. Michigan -2.0 -0.6 15.9 17 8

41. Missouri 1.9 3.0 17.4 20 1

42. Mississippi 3.1 0.5 15.2 16 1

43.Oklahoma 9.0 -1.4 8.3 21 10

44. Nevada 13.8 3.9 15.5 21 1

45. Maryland 3.1 5.0 17.2 18 10

46. Tennessee 2.7 3.0 16.9 18 4

47. Oregon 1.6 -1.4 14.2 22 4

48. Wyoming 8.9 -11.0 4.0 27 3

49. Nebraska 2.3 0.9 14.0 23 3

50. West Virginia 0.1 -5.3 9.3 16 0

n1 DL-direct loans; LG-loan guarantees; BG-bond guarantees; VC-venture capital

n2 AO-advisory office; OM-ombudsman; AC-advisory council; LC-legislative committee SC-statewide conference; PS-procurement set-asides

* Includes union membership in District of Columbia

Sources: Federal Deposit Insurance Corp. (1); Data Resources Inc. (2); U.S. Small Business Administration (3); State development agencies (4); U.S. Department of Labor, Bureau of Labor Statistics (5,6); U.S. Department of Education (7); Department of Commerce, Bureau of Census (8); Tax Foundation (9); INC. survey of 50 states (10); Department of Commerce, Bureau of the Census (11); Department of Commerce, Bureau of Labor Statistics (12); Department of Commerce, Bureau of Economic Analysis (13); Department of Commerce, Bureau of the Census (14); INC. (15)