What makes a state business-friendly? It’s not just taxes, although taxes are a big factor. Variables affecting business-friendliness include the obvious tax rates, tax regulations and labor laws. But they also include the less-obvious infrastructure, quality of life and cost of living.
Ease of Compliance
The first thing most people think of is taxes, and they’re not wrong. Tax rates are an important factor in how businesses view the friendliness of their state, although it’s not the most important factor.
The 2016 Thumbtack.com Small Business Friendliness Survey polled more than 12,000 small business owners about business-friendliness and state and local governments.
According to the survey, small business owners place highest value on ease of licensing and lower taxes, not surprisingly.
A little surprisingly, they put ease of licensing at the top of the list. Furthermore, small business owners found licensing a non-issue in regions where it was easy to comply with licensing regulations. In areas where compliance was difficult, licensing was more of an issue.
Thumbtacks’ survey has consistently shown that the most important factors to small businesses are training and networking opportunities offered by a local government, and the friendliness of complying with regulatory burdens, including, most importantly, the tax rules and licensing laws.
This year…regulations are the most important determinant of friendliness evaluations on both the state and local level. Specifically, for both states and cities, regulatory burdens, led by those surrounding licensing and employment, were among the most important drivers of friendliness ratings.
The lower the state tax rate for a company, the less the company spends on taxes and the more profit they make.
It’s pretty simple, so it’s no surprise that tax rates are an important factor in evaluating state business-friendliness. States that do well on the business-friendliness scale tend to have lower tax rates for businesses.
The absence of a major tax is a common factor among many of the top ten states. Property taxes and unemployment insurance taxes are levied in every state, but there are several states that do without one or more of the major taxes: the corporate income tax, the individual income tax, or the sales tax.
Wyoming, Nevada, and South Dakota have no corporate or individual income tax (though Nevada imposes gross receipts taxes); Alaska has no individual income or state-level sales tax; Florida has no individual income tax; and New Hampshire, Montana, and Oregon have no sales tax.
This does not mean, however, that a state cannot rank in the top ten while still levying all the major taxes. Indiana and Utah, for example, levy all of the major tax types, but do so with low rates on broad bases.
The states in the bottom 10 tend to have a number of shortcomings in common: complex, non-neutral taxes with comparatively high rates. New Jersey, for example, is hampered by some of the highest property tax burdens in the country, is one of just two states to levy both an inheritance tax and an estate tax, and maintains some of the worst-structured individual income taxes in the country.
The states on top of the Tax Foundation’s State Business Tax Climate Index are Wyoming, South Dakota, Alaska, Florida, Nevada, Montana, New Hampshire, Indiana, Utah and Oregon.
The states on the bottom of the Index are Louisiana, Maryland, Connecticut, Rhode Island, Ohio, Minnesota, Vermont, California, New York and New Jersey.
Some Less-Obvious Factors
State economic health may not seem that important on the surface, but its influence is far-reaching.
State economic health depends on debt, budgets, credit rating and overall economic outlook, among other things.
A healthy economy means growth, jobs, consumer spending and a thriving real estate market. Those factors translate into a healthy environment for business.
But a healthy economy also means better education, skilled workers, good infrastructure and an overall better quality of life. Those factors translate into a healthy environment for workers.
Without a large labor pool, companies are dead in the water. One of the most important factors for any business is the availability of skilled employees.
Some states work hard to make sure they have a well-educated, skilled workforce available to industry.
Through quality educational systems, state-run universities and state-sponsored training programs, they’re able to draw and keep companies. These states are also able to retain highly educated or skilled workers.
Education goes hand-in-hand with the workforce. The quality of a state’s educational system helps determine the quality of workers the state produces.
Not only that, the quality of a state’s educational system at all levels influences the state’s attractiveness.
Workers seeking higher education for themselves as well as workers seeking quality education for their children want high-quality educational institutions nearby.
Depending on the type of business, infrastructure is either an influencing factor or a deciding one.
However, most business owners would agree that access to highway, train, air and waterway transportation is vital. They would also agree that the quality of those roads, waterways, bridges and airports is crucial.
Business-Friendliness Depends on a Variety of Factors
While most people think immediately about taxes when they think of business-friendliness, that’s not all there is to it.
Taxes and tax regulations are high on the list, for sure. But things like overall economic health, workforce, education and infrastructure are important as well.