The Best and Worst States For Starting a Business

Often called “The Land Of Opportunity,” the United States of America is typically referred to as a country that encourages innovation and enterprise. While this is still largely the case, there is much variation in attitude when it comes to entrepreneurship in America’s fifty states. Differences in taxes, policy and overall business climate make some states a great place to nurture your company while other states’ high capital gains taxes and corporate taxes give reason to set up shop elsewhere. Below are the five best and the worst places to start a business in the US.

The Best Five States

Virginia

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The September 2009 Forbes article entitled “The Best States For Business” ranks Virginia as number one in the country. “Virginia’s economic development department truly understands what global competition is all about,” adds Brent Pollina, author of a recent study on the benefits of doing business in each state, which also places Virginia at the top spot. Perhaps the many incentives, such as the Virginia Job Investment Program which offers resources to businesses looking for local employees, are what’s led corporations across America to pledge to spend $5.1 billion to relocate here.  Or maybe it’s just the fact that Virginia gives its business owners a break from the huge taxes that many other states impose, consistently keeping taxes around 9.5% of income.

Utah

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Ranked second best in America by the aforementioned Pollina study, Utah is a state dedicated to preserving its business-friendly economic climate. Despite the squeeze that the recent economic downturn has caused, Senate Majority Leader Sheldon Killpack pledged his continued support to state business owners when he addressed Utah’s technology council in 2009. “We have to be wise as we go through this and not make the knee-jerk reactions and go and change the environment for business by jacking up the taxes,” said Killjoy, adding that supporting small businesses during this tough time is like erecting “a massive banner saying, …’Businesses in California, Utah is open for business.’” Killjoy also noted that the state was considering targeting California-based companies and urging them to make the move to Utah, which boasts a tax rate that is almost half that of California’s.

North Carolina

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Third on the Pollina list is North Carolina—and while it may be somewhat unexpected, it’s with good cause.  North Carolina’s non-unionized environment and low regulatory policies have greatly contributed to the state’s business success rate and Site Selection reports that the state  is home to the third largest biotechnology industry in America. A November 2009 Winston-Salem Journal article titled “North Carolina Is Business-Friendly For 8th Year” quotes Site Selection magazine in its affirmation that North Carolina boasts the nation’s top business climate for eight of the past nine years, five of them  consecutive. Housing 482 companies in the bio-tech field and paying close to $3 billion in payroll, the state does not look to be slowing down anytime soon. Jim Fain, secretary of the North Carolina Department of Commerce, commented, “We have fostered the transition of our economy from labor-intensive manufacturing to knowledge-driven capital investment and employment.”

Wyoming

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According to the Wyoming business council’s website, WhyWyoming.org, Wyoming offers many incentives to companies looking to operate within its borders. Bonds, loans and training courses are a few, but the largest one may just be the fact that Wyoming is one of the few states in the country with no personal or corporate income tax, clearly a huge benefit to anyone doing business in the state. For this reason alone, Wyoming ranked number one as the best state in which to conduct business in a 2008 TaxFoundation report. Wyoming also has no inventory tax, which can help manufacturing and retail businesses keep much more of their money than they might in other states. The state goes one step further for manufacturing businesses by allowing all equipment used directly in the manufacturing process to be exempt from sales and use tax, which is otherwise kept at a low rate of 4%.

South Carolina

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South Carolina ranks number 5 on the Pollina study, largely due to its low corporate income tax of only 5%. This rate applies to all businesses in South Carolina, no matter the size or income, and is much more appealing to business owners than the variable rate model that many states have adopted. Low corporate income tax also means that companies can put more money back into their businesses, allowing for lower prices and faster innovation. According to TaxFoundation, South Carolina’s personal income tax is a low 8.8%, almost a full point below the national average. This low rate makes it more appealing to work in South Carolina, which also translates to an abundance of potential employees for new businesses. South Carolina also has a very low property tax rate, which can help new businesses expand faster and operate better facilities. The latest census bureau data shows that South Carolina took in only $923 per capita in 2006, as compared to the $2,355 and $2,159 per capita taken in by New Jersey and Connecticut respectively.

The Worst Five States

New Jersey

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A recent Daily Finance article on the worst states in which to do business places New Jersey “dead last in a list of business-friendly states.” Jersey enforces the nation’s highest property taxes, making it extremely unattractive to purchase land in the state for business use. As if that weren’t bad enough, Jersey is also home to some of the nation’s highest personal and corporate income taxes,  at 11.8% and 9% respectively. This creates an all-around cutthroat work environment, but it doesn’t stop there. New Jersey’s state sales tax is at 7%, which, when combined with the high taxes that businesses have to pay, creates unnecessarily high prices on most goods. For these reasons, New Jersey is perhaps the last place  to which businesses should consider moving.

New York

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Ranked number 49 on the aforementioned Daily Finance list, New York, “…has nothing to crow about.” The state exacts some of the highest property and unemployment insurance taxes in all the country, forcing business owners to ramp up the prices of their products just to stay afloat. In addition, New York has the nation’s highest personal income tax. A 2009 study performed by Forbes investigated New York’s long history of anti-business taxes and regulations, revealing that the state has been hostile toward industry for the last several decades. The article criticizes the state’s attitude toward businesses, claiming  that, “…taxes, fees and fines are worse than ever.” Forbes also found that New York commissioners have consistently promoted “…new social policies that have added to businesses’ burdens.” Ramon Murphy, a local owner of two small businesses and president of the Bodega Association of the United States, says that, “In 25 years, this is the worst I’ve seen things in the city.” But the worst may still be to come as a new bill aims to tax businesses an additional $10.5 billion, which could effectively cripple small business owners and convince entrepreneurs to start their companies elsewhere.

California

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Startups aside, California is known for its anti-business environment and has been cited as one of the worst states in which to operate a business. A report published by Raymond J. Keating of the Small Business & Entrepreneurship Council claims that, “Among the 50 states, California offers the most hostile policy environment for small business.” California enforces some of the country’s highest capital gains taxes, which makes it less attractive for residents to invest in local businesses.  California is also one of the few states to tack an additional tax onto S Corporations. High corporate income taxes in many ways offset the tax benefits that businesses are afforded, making California a difficult state in which to turn a healthy profit. California’s harsh business climate has even caused one of its major employers, Toyota, to relocate. This move has caused a significant blow to the local economy and proves that creating an anti-business atmosphere effects large enterprises just as much as small businesses.

West Virginia

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US News ranks West Virginia as a very unattractive state in which to do business, claiming that “…it consistently ranks as one of states with the lowest per capita income.” The article points to several reasons for this, among them the fact that highly educated professionals are simply less abundant in West Virginia than in surrounding states. This lack of human capital makes it exceedingly difficult to fully staff companies when skilled labor is needed. But instead of compensating for its weaknesses with low taxes, West Virginia ranks in the top 20% of states with the highest corporate income and corporate capital gains tax rates, which makes it even less attractive to do business. In fact, recent TaxFoundation data shows that West Virginia took in $298 per capita in corporate income tax, placing it as the 7th highest in the nation.

Arkansas

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Featured in US News‘ report of the worst states for business, Arkansas is cited as having some of the highest excise taxes in the nation. US News notes that the Arkansas government actually has an extremely high rate of spending, but the money does not seem to go to business interests. In fact, despite the high spending, the state “is not attracting knowledge workers–it ranks last among the states for the educational attainment of recent migrants from other parts of the US.” It is likely that this dearth of educated employees explains why Arkansas is the state with the lowest number of inventor patents per capita. Arkansas also employs a variable corporate income tax model, which is less preferable than a flat rate for business owners. Businesses are sorted into six brackets based on their income, the highest of which is 6.5% for income over $100,000 annually, compared to Nevada, Washington, and Wyoming,  which have no corporate income tax whatsoever.