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Wednesday, December 07, 2011

Positive Lessons from and for the States

The just-published 2011 edition of SBE Council's "Small Business Survival Index" provides both positive and negatives lessons in terms of how public policy affects small businesses and the economy.

The Index is the most comprehensive measure of the public policy climates for entrepreneurship in the 50 states and District of Columbia. By tying together 44 major government-imposed or government-related costs, the states are ranked as to how friendly or unfriendly they are in terms of policy decisions affecting entrepreneurship and investment. The factors included in the Index - assorted taxes, various regulatory costs, government spending and debt, property rights, health care policies, energy costs, and much more - matter to the competitiveness of each state and to the well being of small business.

Of course, the tendency is to focus on what the worst states are doing wrong. And those states - for example, the bottom fifteen are: 37) North Carolina, 38) Maryland, 39) Hawaii, 40) Illinois, 41) Iowa, 42) Massachusetts, 43) Minnesota, 44) Connecticut, 45) Maine, 46) California, 47) Rhode Island, 48) Vermont, 49) New Jersey, 50) New York and 51) District of Columbia - sure do a lot wrong. That attention is expected, since it is critical for these states to turn things around. It's simply natural to focus on what needs fixing.

But the states at the top provide the lessons that the bottom states need to learn. The top fifteen states on the 2011 Index are: 1) South Dakota, 2) Nevada, 3) Texas, 4) Wyoming, 5) South Carolina, 6) Alabama, 7) Ohio, 8) Florida, 9) Colorado, 10) Virginia, 11) Washington, 12) Mississippi, 13) North Dakota, 14) Utah, and 15) Arizona. These states lead by example.

It's very much worth highlighting that five of these states - South Dakota, Nevada, Texas, Wyoming and Washington - impose no personal income, individual capital gains, corporate income, and corporate capital gains taxes. That's good news for entrepreneurship and investment, and they combine for a huge competitive advantage.

In addition, thirteen of the top fifteen states impose no state death taxes. That's a plus for family businesses and investors.

And since taxes ultimately tie back to the size of government, ten of these top fifteen states rank in the top half of the states in terms of per capita state and local government spending.

For good measure, it's not just what these states do well. But it's limiting what they do poorly. No government is going to be perfect. Indeed, far from it. The states at the bottom of the "Small Business Survival Index" do many things wrong. The states at the top tend to limit their negatives to a far narrower number of measures. That, of course, means that even the best states on the Index have room for improvement.

Finally, it's worth highlighting states that have climbed in the rankings largely due to recent positive policy changes.

For example, Mississippi improved its position by moving from one of the worst ranked states in terms of protecting private property to one of the better states. In November 2011, voters approved a ballot measure that improved the state's protections against eminent domain abuses.

North Dakota has moved into the top fifteen on the Index due in large part to reductions in individual and corporate income and capital gains tax rates.

Also, Ohio undertook tax reforms that included the elimination of its corporate income and corporate capital gains taxes, which vastly improved its competitive position.

Ranking poorly in terms of the public policy climate for entrepreneurship, investment and business is not predestined. To the contrary, it's all about what decisions are made by policymakers. If states want to improve their competitive positions, then looking at what the top states on the Index do is a good place to start.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His new book is "Chuck" vs. the Business World: Business Tips on TV.

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