Which States are Friendliest to Businesses?

Sep 22, 2012

business friendly statesExpanding your business is easy when you plan to stay in the same state, but many franchisors and large corporations are scouting out new locations across the country.  If you are planning a multi-state expansion, it helps to know ahead of time which states are most “business-friendly.” 

According to the Ewing Marion Kauffman Foundation, an organization dedicated to entrepreneurship, some of the best states for small business development are Oklahoma, Texas, Idaho and Utah.  Failing grades were given to Rhode Island, Vermont, California and Hawaii.  This particular study was based on data collected by more than 7,000 respondents about demographics and how small businesses are doing in their state, including the cost of hiring employees, overall regulatory friendliness and the friendliness of the tax code. 

What are the major findings of “business-friendliness” studies?

Texas, which was ranked among the most business-friendly states, has three out of the five highest-ranked cities on the list.  San Antonio, Dallas-Fort Worth and Austin are among the best cities for business owners in America, as evidenced by their strong technology sectors.  Not surprisingly, California (one of the lowest-ranked states) has three of the lowest rated cities for doing business – San Diego, Sacramento and Los Angeles. 

According to respondents, a state’s licensing laws are nearly twice as important as tax rates in judging its business-friendliness.  For small business owners, requirements for occupational licenses are often unnecessary and cost-prohibitive to business owners and employees.  As a result, simple licensing regulations and accessible training programs are critical to the support of small business owners.

The Ten States Most Friendly for Taxes and Regulations

States have faced some major challenges over the past five years as revenue from the federal government was cut and unemployment has shrunk the tax base.  Amidst these struggles, there are still some shining stars in the union that have been successful in keeping taxes low and attracting new businesses.  In addition to many private studies, the U.S. Chamber of Commerce has done its own ranking of the top states for businesses, but theirs is based on the cost of living, local tax burden, business taxes and regulations. 

#10 Utah – Utah plans to keep taxes low in the face of rising unemployment by streamlining government operations.   According to the U.S. Chamber of Commerce, the Beehive State has a $400 million deficit, which is small by state standards.  As a result, they haven’t had to raise taxes.  The state has recently launched an advisory committee to help optimize its efficiency, including a call for review of cumbersome regulatory processes that impact the business climate of the state.

#9 North Dakota – North Dakota has gained national recognition for largely avoiding the worst of the recession.  Because unemployment hasn’t been a problem here, the state’s tax base is still intact.  Subsequently, the Peace Garden State is attempting to attract more investment in its energy sector.  One key fact from the U.S. Chamber of Commerce report is that individual state income tax was cut by 18 percent and corporate tax by 20 percent. 

#8 Kentucky – This may come as a surprise to many residents of southern Border States, but the state of Kentucky maintains the lowest cost of living in the country.  According to the U.S. Chamber of Commerce report on business-friendliness, Kentucky has balanced its budget eight times without the making significant tax increases.  One of their business-friendly programs, known as the Kentucky Small Business Investment Credit, was designed to attract more business owners to the state.

#7 Missouri – Missouri may have lost $860 million in federal funding, but the state maintains a number of business-friendly practices.  The U.S. Chamber of Commerce report says the state is currently working on a streamlined approach to tax credits and only income earned in Missouri is taxed.  The “Show Me” State has also enacted reforms to its workers compensation system as well.

#6 Texas – The Lone Star State is well known for its low tax rates and affordable cost of living, as well as its business friendly climate.  Thanks to its growing technology and manufacturing sectors, the state is adding jobs much faster than other large states.  One of the biggest selling points for relocating your business to Texas?  No personal income tax. 

#5 Indiana – Known by many industry experts as the “comeback kid,” Indiana has turned its budget situation round through a series of government reforms that improved efficiency.  The Hoosier State has managed to balance its biannual budget with a $1 billion surplus while providing taxpayers with an automatic refund if revenue exceeds certain benchmarks.  As for business-friendliness, the U.S. Chamber of Commerce report has recognized Indiana for reducing its corporate taxes. 

#4 Alaska – The Last Frontier State has closed its budget gap and realized almost $12 billion in savings, so it won’t be asking for money from taxpayers to fill state coffers.  Highlights from the report include a two-year suspension in the motor fuel tax and state tax incentives for oil and gas exploration. 

#3 Wyoming – After entering the year with a budget surplus, Wyoming is focusing on a more diversified economy.  Governor Mead has streamlined the functions of government and offers a business-friendly tax climate which includes a tax exemption for manufacturers’ regular purchases.

#2 South Dakota – According to the U.S. Chamber of Commerce report, South Dakota offers the nation’s most favorable business tax climate.  It has no personal income tax, personal property tax, corporate income tax, inheritance tax or business inventory tax; plus the Governor’s January budget called for a 10 percent tax reduction.  Even sales tax is a reasonable 4 percent.

#1 Tennessee – A number of factors have contributed to Tennessee’s #1 ranking by the U.S. Chamber of Commerce, among them the low cost of living and business-friendly state legislature.  Its various departments work together to make this a “no surprises’ state in terms of regulatory policy.  Tennessee also offers a Job Tax Credit for businesses who create jobs, no personal income tax and sales tax reductions for manufacturers. 

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