Which US states are "business friendly"?
Summary:
- In response to my essay States Facing Significant Fiscal Challenges, a reader in Connecticut sent me a paper that seems to contradict the poor ranking of his home state in terms of GDP growth, tax collection trends, declining attraction to young educated workers, net migration of its citizens, and financial health.
- The paper, essentially an argument that Connecticut businesses should pay more in taxes, argues that Connecticut is one of the most attractive locations for business based on EY’s (Ernst & Young) “Total Effective Business Tax Rate” (TEBTR) measure. However, EY states TEBTR is not a comprehensive measure of a state’s business attractiveness.
- How can one deduce whether a state’s business climate is attractive? Key evidence can be found in voluntary movements by companies, movements by more mobile hedge funds/investment managers, and by net business expansions and openings both by number and as a percentage of employment.
The Connecticut Argument
Opportunities for Growth: Business Tax Advantages, Economic Strengths, and Quality of Life Perceptions in Connecticut was written by three Connecticut state employees, professors at Central Connecticut State University. While the paper was prepared under the auspices of the “Center for Public Policy and Social Research at Central Connecticut State University”, it appears to be a political piece rather than a research paper. It’s title page curiously states that it was “submitted to the Connecticut AFL-CIO.” The paper asserts that Connecticut is attractive to businesses because business taxes are low relative to other states. It further suggests Connecticut businesses should be happy to pay more taxes because of the benefit they receive in the form of educated employees due to state spending on education.
The TEBTR is the key business metric the paper relies upon to make their argument. This ratio divides total business taxes by the private gross state product (“GSP”; essentially state GDP less government activity). Connecticut and Oregon had the two lowest TEBTRs in the country in 2014 according to the EY paper the concept was derived from. However, the authors of “Opportunities for Growth” have a hard time reconciling why Connecticut has had such poor economic and employment growth despite its attractive TEBTR. Disingenuously, they never reference the fact that the very EY paper they cite specifically advises against concluding that the TEBTR is a good descriptor of a state’s tax environment.
The EY paper is clear that while TEBTRs might be a starting point,
“...they do not provide sufficient information to evaluate a state’s competitiveness. States with relatively low TEBTRs that derive most of their business taxes from origin-based taxes such as property taxes and sales taxes are not as competitive as states with higher TEBTRs that rely on taxes that have a larger impact on out-of-state businesses. TEBTRs also do not indicate the economic incidence of a tax. When a tax can be passed on to consumers, the tax is not a burden in the same way as taxes where the economic incidence, not just the legal liability, falls on the owners of a business.”
In fact EY explicitly discusses Connecticut (bolding is mine):
“Connecticut is home to several high-output industries, including insurance, financial services and aerospace. Connecticut’s economy generates a large amount of GSP per worker, meaning that while Connecticut imposes higher-than-average taxes on a per-worker basis, its business taxes are significantly below the national average when measured per dollar of GSP. These results should not be interpreted to mean that Connecticut is a low-tax environment overall.”
These last observations makes one realize that the “Opportunities for Growth” corollary argument that Connecticut business taxes are low as a share of all taxes collected simply means that Connecticut’s combined tax rate on individuals is the second highest in the country.
Deducing Whether A State Is Business “Friendly”
How can one infer whether a state is business friendly? It is not as easy a task as one might guess because many economic forces can influence whether particular industries are contracting or expanding at any one point in time. You can ask business owners directly, as Thumbtack.com does in their small business survey shown in the headline graphic above. However, it is not clear how comprehensive or biased such surveys are.[1] Another way to get at the issue is to observe voluntary behavior by businesses.
Public Companies Who Relocate Their Headquarters
While most businesses do not relocate their company headquarters, some do. As an exercise, I took all filers of 10-Q or 10-Ks (a required filing for public companies) in the first quarter of 2017 and compared the location of their headquarters now to where their location was in the first quarter of 2007. Out of 2,644 companies for which I could match 2017 and 2007 data, there were 249 who moved their headquarters. Table 1 shows moves in, out, net moves and net moves divided by the average of moves in and out. This last measure of the percentage of net movers is helpful because the gross number of movers is related to the size of a state’s population.
Table 1: 10-K/10-Q Filers Who Moved Main Business Address from Q1 2007 to Q1 2017
By inference, the states at the top of the table are the least business friendly and the ones at the bottom are most business friendly.
Investment Managers/Hedge Funds Who Relocated Their Headquarters
While many industrial companies find it difficult to relocate their headquarters due to reliance on inputs like natural resources or access to ports, hedge funds and investment managers are generally less restricted by location. While physical proximity to clients can be helpful, it is less determinative. As a second exercise, I took all 13F filers (13F is a required disclosure of investment holdings) who were not 10-Q or 10-K filers (so as not to overlap with the exercise above) in the first quarter of 2017 and again compared the location of their headquarters now to where it was in the first quarter of 2007. Out of 1,745 firms for which I could match 2017 and 2007 data, there were 107 who moved their headquarters. Table 2 summarizes their movements by state.
Table 2: 13F (non 10-K/10-Q) Filers Who Moved Main Business Address from Q1 2007 to Q1 2017
While Table 2 is less comprehensive than Table 1, there is some overlap between the trends shown in both tables.
Business Openings And Closings
One obvious limitation of the two “movers” exercises described above is that they only cover the subset of businesses required to file with the SEC. A broader set of data covering all businesses is provided by the US Bureau of Labor Statistics in data series on business openings and closings by state. Presumably if a state is unusually “business friendly”, it should see companies choosing to open businesses there.
Table 3 shows state rank each year based on net openings (i.e., openings minus closings) divided by gross openings. The ratio is used again to normalize for the fact that states with larger populations see larger numbers for both openings and closings. The table is sorted by 2015 rank from worst to best.
Table 3: State Rank For Net Openings/Gross Openings Using BLS Data (1 = Worst Rank)
State
|
2006
|
2007
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
Washington
|
14.0
|
40.0
|
18.0
|
50.0
|
46.0
|
1.0
|
3.0
|
46.0
|
46.0
|
1.0
|
New Mexico
|
32.0
|
37.0
|
24.0
|
32.0
|
17.0
|
4.0
|
13.0
|
4.0
|
36.0
|
2.0
|
North Dakota
|
35.0
|
48.0
|
50.0
|
49.0
|
50.0
|
50.0
|
48.0
|
50.0
|
35.0
|
3.0
|
West Virginia
|
11.0
|
3.0
|
20.0
|
22.0
|
4.0
|
29.0
|
6.0
|
1.0
|
5.0
|
4.0
|
Oklahoma
|
36.0
|
25.0
|
44.0
|
18.0
|
49.0
|
33.0
|
41.0
|
45.0
|
41.0
|
5.0
|
Michigan
|
4.0
|
1.0
|
4.0
|
8.0
|
6.0
|
22.0
|
40.0
|
36.0
|
28.0
|
6.0
|
Mississippi
|
41.0
|
29.0
|
9.0
|
16.0
|
18.0
|
11.0
|
2.0
|
9.0
|
6.0
|
7.0
|
Delaware
|
5.0
|
17.0
|
21.0
|
1.0
|
48.0
|
6.0
|
42.0
|
18.0
|
44.0
|
8.0
|
Vermont
|
8.0
|
11.0
|
13.0
|
19.0
|
27.0
|
17.0
|
7.0
|
25.0
|
29.0
|
9.0
|
Connecticut
|
20.0
|
14.0
|
15.0
|
2.0
|
43.0
|
31.0
|
19.0
|
11.0
|
9.0
|
10.0
|
Louisiana
|
48.0
|
46.0
|
37.0
|
29.0
|
26.0
|
43.0
|
11.0
|
34.0
|
18.0
|
11.0
|
Kansas
|
6.0
|
28.0
|
42.0
|
40.0
|
20.0
|
24.0
|
9.0
|
24.0
|
17.0
|
12.0
|
Kentucky
|
22.0
|
31.0
|
30.0
|
21.0
|
14.0
|
23.0
|
8.0
|
49.0
|
26.0
|
13.0
|
Wyoming
|
45.0
|
47.0
|
48.0
|
44.0
|
41.0
|
45.0
|
25.0
|
26.0
|
39.0
|
14.0
|
Pennsylvania
|
19.0
|
13.0
|
39.0
|
39.0
|
47.0
|
9.0
|
33.0
|
3.0
|
12.0
|
15.0
|
Alaska
|
9.0
|
7.0
|
33.0
|
48.0
|
31.0
|
40.0
|
23.0
|
8.0
|
24.0
|
16.0
|
Maryland
|
24.0
|
15.0
|
19.0
|
20.0
|
23.0
|
19.0
|
15.0
|
12.0
|
13.0
|
17.0
|
Alabama
|
31.0
|
32.0
|
10.0
|
3.0
|
3.0
|
7.0
|
17.0
|
16.0
|
11.0
|
18.0
|
Nebraska
|
21.0
|
27.0
|
40.0
|
47.0
|
37.0
|
39.0
|
49.0
|
39.0
|
16.0
|
19.0
|
Ohio
|
3.0
|
12.0
|
3.0
|
11.0
|
36.0
|
5.0
|
10.0
|
14.0
|
8.0
|
20.0
|
New York
|
29.0
|
30.0
|
34.0
|
42.0
|
42.0
|
34.0
|
20.0
|
32.0
|
20.0
|
21.0
|
Hawaii
|
28.0
|
20.0
|
17.0
|
14.0
|
7.0
|
10.0
|
30.0
|
15.0
|
19.0
|
22.0
|
Iowa
|
25.0
|
21.0
|
31.0
|
45.0
|
1.0
|
8.0
|
43.0
|
47.0
|
4.0
|
23.0
|
New Jersey
|
16.0
|
23.0
|
22.0
|
30.0
|
19.0
|
12.0
|
14.0
|
19.0
|
3.0
|
24.0
|
Arkansas
|
47.0
|
33.0
|
45.0
|
38.0
|
2.0
|
47.0
|
1.0
|
5.0
|
7.0
|
25.0
|
Wisconsin
|
10.0
|
2.0
|
23.0
|
15.0
|
16.0
|
20.0
|
45.0
|
44.0
|
31.0
|
26.0
|
Maine
|
15.0
|
18.0
|
36.0
|
43.0
|
35.0
|
21.0
|
16.0
|
28.0
|
15.0
|
27.0
|
Georgia
|
13.0
|
36.0
|
25.0
|
17.0
|
13.0
|
13.0
|
24.0
|
22.0
|
49.0
|
28.0
|
Indiana
|
7.0
|
6.0
|
32.0
|
6.0
|
24.0
|
14.0
|
12.0
|
7.0
|
21.0
|
29.0
|
Rhode Island
|
23.0
|
5.0
|
14.0
|
25.0
|
33.0
|
25.0
|
31.0
|
10.0
|
23.0
|
30.0
|
Minnesota
|
1.0
|
41.0
|
1.0
|
31.0
|
11.0
|
48.0
|
36.0
|
13.0
|
10.0
|
31.0
|
Missouri
|
43.0
|
4.0
|
43.0
|
35.0
|
39.0
|
46.0
|
39.0
|
31.0
|
48.0
|
32.0
|
Illinois
|
26.0
|
10.0
|
29.0
|
33.0
|
29.0
|
18.0
|
5.0
|
6.0
|
27.0
|
33.0
|
North Carolina
|
50.0
|
49.0
|
8.0
|
12.0
|
22.0
|
28.0
|
28.0
|
30.0
|
25.0
|
34.0
|
Texas
|
39.0
|
43.0
|
47.0
|
46.0
|
44.0
|
44.0
|
44.0
|
42.0
|
40.0
|
35.0
|
New Hampshire
|
30.0
|
9.0
|
27.0
|
26.0
|
25.0
|
30.0
|
35.0
|
17.0
|
14.0
|
36.0
|
Oregon
|
38.0
|
19.0
|
12.0
|
13.0
|
21.0
|
27.0
|
22.0
|
21.0
|
33.0
|
37.0
|
South Dakota
|
34.0
|
34.0
|
38.0
|
34.0
|
45.0
|
36.0
|
32.0
|
23.0
|
43.0
|
38.0
|
Utah
|
49.0
|
44.0
|
35.0
|
5.0
|
34.0
|
42.0
|
46.0
|
48.0
|
42.0
|
39.0
|
Colorado
|
33.0
|
38.0
|
28.0
|
23.0
|
15.0
|
38.0
|
37.0
|
41.0
|
47.0
|
40.0
|
Arizona
|
44.0
|
24.0
|
11.0
|
28.0
|
5.0
|
16.0
|
27.0
|
27.0
|
22.0
|
41.0
|
Massachusetts
|
12.0
|
22.0
|
41.0
|
36.0
|
40.0
|
49.0
|
47.0
|
40.0
|
50.0
|
42.0
|
Nevada
|
42.0
|
35.0
|
6.0
|
9.0
|
30.0
|
32.0
|
38.0
|
43.0
|
38.0
|
43.0
|
South Carolina
|
46.0
|
16.0
|
5.0
|
10.0
|
8.0
|
26.0
|
18.0
|
35.0
|
37.0
|
44.0
|
Florida
|
27.0
|
8.0
|
2.0
|
24.0
|
28.0
|
35.0
|
29.0
|
38.0
|
34.0
|
45.0
|
Tennessee
|
2.0
|
50.0
|
16.0
|
4.0
|
9.0
|
15.0
|
21.0
|
20.0
|
30.0
|
46.0
|
California
|
17.0
|
45.0
|
46.0
|
41.0
|
12.0
|
3.0
|
50.0
|
29.0
|
32.0
|
47.0
|
Idaho
|
40.0
|
26.0
|
7.0
|
7.0
|
10.0
|
2.0
|
4.0
|
33.0
|
45.0
|
48.0
|
Montana
|
37.0
|
42.0
|
26.0
|
27.0
|
32.0
|
37.0
|
26.0
|
37.0
|
1.0
|
49.0
|
Virginia
|
18.0
|
39.0
|
49.0
|
37.0
|
38.0
|
41.0
|
34.0
|
2.0
|
2.0
|
50.0
|
If you read across the rows, you see that state rank can vary quite a bit from year to year. Oil producing states, for example, have seen poor rankings recently due to the decline in oil prices. This serves as a warning that this measure is partially confounded by cycles of economic activity. However there are also states with persistent trends (e.g., Massachusetts, Colorado, Texas).
Business Expansion/Openings vs. Contraction/Closings As Percent Of Employment
While numbers of movers, openings and closings may be indicative of a state’s business climate, ultimately employment is more important for a state’s fiscal health (the original focus of States Facing Significant Fiscal Challenges). Table 4 shows state rank for net percentage employment increase from business expansion/openings less business contraction/closings. Again, the table is sorted by 2015 rank from worst to best.
Table 4: State Rank For Net Percent Employment Increase Due to Expansion/Openings Minus Contraction/Closings From BLS Data (1 = Worst Rank)
State
|
2006
|
2007
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
2014
|
2015
|
North Dakota
|
39.0
|
45.0
|
50.0
|
50.0
|
50.0
|
50.0
|
50.0
|
50.0
|
50.0
|
1.0
|
Wyoming
|
50.0
|
50.0
|
48.0
|
1.0
|
45.0
|
45.0
|
4.0
|
11.0
|
24.5
|
2.0
|
West Virginia
|
23.0
|
13.0
|
43.0
|
43.0
|
10.5
|
46.0
|
1.0
|
1.0
|
1.5
|
3.0
|
Oklahoma
|
34.0
|
39.0
|
47.0
|
3.0
|
48.0
|
28.0
|
41.0
|
12.5
|
32.0
|
4.0
|
Alaska
|
30.0
|
5.0
|
49.0
|
49.0
|
40.0
|
37.0
|
23.0
|
18.0
|
3.5
|
5.0
|
Louisiana
|
48.0
|
44.0
|
45.0
|
31.0
|
14.0
|
27.0
|
25.5
|
33.5
|
36.0
|
6.0
|
New Mexico
|
47.0
|
29.5
|
32.5
|
16.0
|
8.0
|
1.0
|
19.5
|
6.0
|
24.5
|
7.0
|
Connecticut
|
19.0
|
17.5
|
26.0
|
29.5
|
20.0
|
9.0
|
7.0
|
4.5
|
6.0
|
8.0
|
Iowa
|
28.0
|
29.5
|
38.0
|
36.5
|
17.0
|
21.0
|
32.0
|
24.5
|
7.0
|
10.0
|
Kansas
|
37.5
|
35.0
|
41.0
|
14.5
|
12.0
|
6.0
|
32.0
|
31.5
|
14.0
|
10.0
|
Vermont
|
3.5
|
8.0
|
34.0
|
48.0
|
35.0
|
19.0
|
12.0
|
3.0
|
5.0
|
10.0
|
Pennsylvania
|
19.0
|
34.0
|
37.0
|
42.0
|
47.0
|
22.5
|
8.5
|
7.0
|
23.0
|
12.0
|
Rhode Island
|
19.0
|
1.0
|
15.5
|
34.5
|
10.5
|
2.0
|
6.0
|
15.0
|
21.5
|
13.0
|
Illinois
|
21.5
|
26.0
|
20.5
|
18.0
|
34.0
|
16.5
|
17.0
|
10.0
|
18.0
|
14.0
|
Delaware
|
7.0
|
10.5
|
22.0
|
7.0
|
31.0
|
7.0
|
16.0
|
36.5
|
43.0
|
16.5
|
Minnesota
|
3.5
|
29.5
|
29.5
|
29.5
|
31.0
|
41.0
|
25.5
|
26.5
|
10.0
|
16.5
|
Ohio
|
2.0
|
6.0
|
12.0
|
11.5
|
37.0
|
30.0
|
25.5
|
29.5
|
26.0
|
16.5
|
Texas
|
44.5
|
49.0
|
44.0
|
27.0
|
49.0
|
49.0
|
47.5
|
45.5
|
48.0
|
16.5
|
Michigan
|
1.0
|
3.0
|
4.0
|
5.0
|
46.0
|
48.0
|
35.5
|
33.5
|
28.0
|
19.5
|
South Dakota
|
37.5
|
41.0
|
46.0
|
36.5
|
31.0
|
32.5
|
12.0
|
22.0
|
16.0
|
19.5
|
Wisconsin
|
10.0
|
13.0
|
26.0
|
21.0
|
37.0
|
13.0
|
19.5
|
15.0
|
16.0
|
21.0
|
New Hampshire
|
12.5
|
10.5
|
28.0
|
38.0
|
17.0
|
19.0
|
5.0
|
28.0
|
13.0
|
22.0
|
Massachusetts
|
21.5
|
29.5
|
39.0
|
44.0
|
44.0
|
26.0
|
21.5
|
22.0
|
31.0
|
24.0
|
Nebraska
|
24.5
|
42.0
|
42.0
|
39.0
|
13.0
|
13.0
|
44.0
|
22.0
|
10.0
|
24.0
|
New Jersey
|
8.5
|
17.5
|
18.0
|
40.5
|
4.0
|
9.0
|
8.5
|
12.5
|
10.0
|
24.0
|
Mississippi
|
40.0
|
17.5
|
15.5
|
24.0
|
22.5
|
3.0
|
15.0
|
19.5
|
8.0
|
26.0
|
Alabama
|
8.5
|
36.5
|
11.0
|
14.5
|
4.0
|
4.0
|
14.0
|
15.0
|
19.5
|
28.0
|
Indiana
|
6.0
|
7.0
|
13.5
|
24.0
|
42.0
|
38.5
|
39.0
|
29.5
|
21.5
|
28.0
|
New York
|
24.5
|
36.5
|
40.0
|
45.5
|
37.0
|
35.5
|
21.5
|
26.5
|
30.0
|
28.0
|
Arkansas
|
14.5
|
13.0
|
35.5
|
45.5
|
9.0
|
32.5
|
3.0
|
2.0
|
39.5
|
30.5
|
Kentucky
|
27.0
|
29.5
|
20.5
|
32.0
|
31.0
|
22.5
|
29.0
|
24.5
|
34.5
|
30.5
|
Maryland
|
16.0
|
15.0
|
23.5
|
34.5
|
31.0
|
13.0
|
18.0
|
8.0
|
16.0
|
32.0
|
Washington
|
36.0
|
46.0
|
31.0
|
26.0
|
42.0
|
41.0
|
35.5
|
40.0
|
44.0
|
33.0
|
Missouri
|
17.0
|
23.5
|
29.5
|
28.0
|
6.0
|
13.0
|
12.0
|
17.0
|
28.0
|
34.0
|
Maine
|
5.0
|
23.5
|
23.5
|
47.0
|
2.0
|
5.0
|
2.0
|
9.0
|
19.5
|
35.0
|
Colorado
|
32.5
|
43.0
|
32.5
|
8.0
|
15.0
|
41.0
|
46.0
|
49.0
|
45.5
|
36.5
|
Hawaii
|
30.0
|
20.5
|
5.0
|
33.0
|
25.5
|
29.0
|
44.0
|
36.5
|
12.0
|
36.5
|
Montana
|
43.0
|
48.0
|
26.0
|
24.0
|
7.0
|
43.0
|
34.0
|
19.5
|
1.5
|
38.0
|
North Carolina
|
42.0
|
40.0
|
13.5
|
17.0
|
22.5
|
24.5
|
32.0
|
31.5
|
34.5
|
39.0
|
California
|
14.5
|
23.5
|
17.0
|
11.5
|
25.5
|
34.0
|
47.5
|
42.0
|
37.5
|
40.0
|
Georgia
|
30.0
|
17.5
|
10.0
|
19.5
|
28.0
|
19.0
|
40.0
|
41.0
|
47.0
|
41.5
|
South Carolina
|
41.0
|
33.0
|
6.5
|
11.5
|
42.0
|
24.5
|
29.0
|
38.0
|
41.0
|
41.5
|
Tennessee
|
12.5
|
20.5
|
8.5
|
19.5
|
27.0
|
44.0
|
37.5
|
35.0
|
37.5
|
43.0
|
Oregon
|
35.0
|
29.5
|
8.5
|
6.0
|
39.0
|
38.5
|
25.5
|
45.5
|
39.5
|
44.0
|
Arizona
|
44.5
|
4.0
|
3.0
|
4.0
|
17.0
|
31.0
|
44.0
|
39.0
|
33.0
|
45.0
|
Nevada
|
32.5
|
9.0
|
1.0
|
2.0
|
1.0
|
13.0
|
29.0
|
45.5
|
49.0
|
46.0
|
Virginia
|
11.0
|
23.5
|
35.5
|
40.5
|
19.0
|
16.5
|
10.0
|
4.5
|
3.5
|
47.0
|
Idaho
|
46.0
|
38.0
|
6.5
|
9.0
|
4.0
|
9.0
|
37.5
|
48.0
|
28.0
|
48.0
|
Utah
|
49.0
|
47.0
|
19.0
|
11.5
|
22.5
|
47.0
|
49.0
|
43.0
|
42.0
|
49.0
|
Florida
|
26.0
|
2.0
|
2.0
|
22.0
|
22.5
|
35.5
|
42.0
|
45.5
|
45.5
|
50.0
|
A row by row reading of the table once again shows both cycles of economic activity and persistent trends.
For Connecticut readers who have been keeping score, there is little in these data series to support the claim made by the authors of “Opportunities for Growth” that Connecticut is unusually attractive to businesses. While Connecticut is doing alright with hedge funds/investment firms based on Table 2, it fares poorly in Tables 1, 3 and 4. It is hard to see how increasing taxes on businesses in Connecticut will improve its “business friendly” standing.
Comments