Best and Worst States for Small Business

WASHINGTON (MainStreet) -- Which state is the most small-business friendly?

Factors such as taxes, regulatory costs, government spending, property rights, gas and diesel taxes, health care policies and energy costs play a large part in whether a business should locate in a certain state. The Small Business & Entrepreneurship Council takes these measures and ranks the 50 states and the District of Columbia annually based on their public policy climates for entrepreneurship.

"Low corporate and individual tax rates can make all the difference, especially for a small business that is just getting started," says Deborah Sweeney, CEO of MyCorporation, an online document preparation service for small businesses. "It may be difficult for a small business to get off the ground in the face of the difficult tax structures and the high cost of hiring employees."

The most recent Small Business Index Survival 2011, released in November, added six measures by which to rank states, making for a total of 44 major government-imposed or government-related costs factors that matter to small businesses and entrepreneurs.

While state tax policy and regulatory costs certainly weigh the most in the overall ranking of each state, given the country's economic climate the SBE Council decided to add state and local debt levels as well as the dependence on federal funding at the state and local level to provide a clearer picture of how friendly or unfriendly each state is for small business.

Another new measure included was state wireless taxes, something that will be particularly important given the amount of business now done online and through smartphones and tablets.

In a suggestion of another reason these factors matter: From 2000 to 2010 the top 25 states on the 2011 Index saw population growth of 13.4%, while in the bottom 26, population growth registered at just 6.3%, the report says.

States business climates are also getting a look from one of the biggest entrepreneurial advocates, The Ewing Marion Kauffman Foundation. Kauffman's 2012 State of Entrepreneurship Address focused on how state and local policymakers can foster start-ups.

"First, with gridlock in Washington, states and localities have more opportunities for reform and fewer institutional obstacles," Kauffman's interim president and CEO, Benno Schmidt, said in his address last week. "Second, our scholars' discussions with entrepreneurs turned up a finding that will be surprising to some: It's state and local laws and regulations that matter to them as much, or more, than federal statutes."

"The bottom line from our reports is simple: States should do all they can to make it easier to start a business," Schmidt said. "Regrettably, many states, in hopes of re-creating Silicon Valley, enact all manner of public programs to promote and help entrepreneurs, but leave in place a legal framework that adheres to a different model of employment."

High capital gains taxes will also chase away investment in certain states, and as we all know, access to capital is one of the biggest hurdles for small businesses, Keating adds.

Property taxes can also be a huge detriment to the formation of business.

"For example, Long Island, New York, already has sky-high property taxes and the emphasis is always on residential taxes, but businesses pay property taxes as well. From a business standpoint, when you look at that issue, it's two things: the bill you're paying as a business; and then also you have to deal with the reality that when it comes to what my employees are paying in taxes and how does that affect my labor pool? If you jack up taxes, you chase people away," says Raymond Keating, the SBE Council's chief economist.

There are other reasons that some states, even if they are tax unfriendly, find themselves with a significant level of entrepreneurism and enterprise, Sweeney says.

"These include states that have investors and scholastic opportunities for entrepreneurial training. California and other states in the Northwest, for example, have excellent schools that focus on training entrepreneurs and investors who are willing to invest in them even during difficult economic times," Sweeney says.

This year's list of the top five small-business-friendly states, as well as a list of the five most unfriendly states, didn't have many dramatic changes as compared with the 2010 Index, but clearly reflect the SBE Council's new measures: