PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Small Business Week and the “Small Business Policy Index 2019”

By at 10 May, 2019, 10:46 am

by Raymond J. Keating-

At the Small Business & Entrepreneurship Council (SBE Council), we just published Small Business Policy Index 2019: Ranking the States on Policy Measures and Costs Impacting Small Business and Entrepreneurship.” This is the 23rd annual edition of the report (view an interactive map with rankings and summaries).

It’s fitting that the study is being published during National Small Business Week. After all, it seems like all elected officials – from Congress down to local towns – say that they love small business and want to see American entrepreneurs succeed. And sometimes their rhetoric about small businesses is backed up by actions, but in other cases, legislative actions are in direct conflict with the well-being of small businesses and entrepreneurship.

The Index specifically evaluates the states according to such actions, specifically, ranking the 50 states “according to various major government-imposed or government-related costs that directly or indirectly affect entrepreneurship and business, as well as the investment that is so critical to start-ups and businesses looking to grow. To sum up, the Index ranks the states according to their public policy climates for the risk taking that drives economic growth and job creation. Of the 62 measures included in the 2019 edition of the Index, 27 are taxes or tax related, 26 relate to rules and regulations, 6 deal with government spending and debt issues, with the 3 remaining measures gauging the effectiveness of important government undertakings.”

More so than perhaps any other group, small business owners understand the burdens of taxes and regulations. As noted in the report, “Most small business owners have firsthand knowledge of the costs and burdens imposed by government. Taxes and regulations, for example, drain enterprises of vital resources, distort decision-making and incentives, and redirect resources and energies away from improving and/or expanding a business.”

For good measure, economic thinking informs us that the greater the burdens placed on entrepreneurship and investment, the greater the ills for the economy. And the Index actually includes a section citing a long list of studies verifying the negative effects of taxes, regulatory costs (such as the minimum wage and workers’ compensation costs), and government spending.

Along these same lines, the Index includes an analysis that breaks down economic growth, population growth, and movement of people among the states, and compares the states ranked as the top 25 on the Index vs. the bottom 25. Consider:

State Economic Growth. Real average annual economic growth from 2010 to 2017 among the top 25 states ranked on the 2019 “Small Business Policy Index” averaged 1.76 percent, which was 38 percent faster than the 1.28 percent average rate for the bottom 25 states. So, on average, economic growth performed markedly better during this poor recovery among the top 25 states on the Index compared to the bottom 25 states.

Population Growth. The top 25 states ranked on the 2019 “Small Business Policy Index” averaged state population growth of 6.94 percent from 2010 to 2018 versus only 3.35 percent for the bottom 25 states. That is, the average growth rate was 107 percent higher among the top 25 states versus the bottom 25 states. In terms of total population numbers, the top 25 states saw an increase in population of 13 million from 2010 to 2018 versus a gain of 4.8 million in the bottom 25 states.

Population Movements – Net Domestic Migration. Perhaps most telling is net domestic or internal migration, or the movement of people between the states, that is, excluding births, deaths and international migration. It clearly captures people voting with their feet. From 2010 to 2018, the top 25 states on the “Small Business Policy Index” netted a 3.73 million increase in population at the expense of the bottom 25 states, which lost 3.76 million (with the District of Columbia’s gain explaining the difference). For good measure, among the bottom 25 states, 18 lost population to other states, and the bottom 7 states all suffered negative domestic migration.

So, it’s clear that such issues as tax and regulatory burdens matter. Having said all of this, which states get things right and which ones don’t? Well, the most entrepreneur-friendly states on the “Small Business Policy Index 2019” are: 1) Texas, 2) Nevada, 3) Florida, 4) South Dakota, 5) Wyoming, 6) Indiana, 7) Utah, 8) Alabama, 9) Arizona, 10) Washington, 11) Tennessee, 12) Colorado, 13) Ohio, 14) Michigan, 15) North Carolina.

Meanwhile, the most unfriendly policy environments for small businesses are: 41) Maine, 42) Iowa, 43) Oregon, 44) Connecticut, 45) Vermont, 46) Minnesota, 47) New York, 48) Hawaii, 49) California, 50) New Jersey.

As for states that made some significant policy changes since the previous year’s Index, the following positive moves show lawmakers working to actually improve their state’s climate for entrepreneurship, and they deserve “thumbs ups” during National Small Business Week:

●  Georgia reduced its personal income, individual capital gains, corporate income and corporate capital gains tax rates from 6 percent to 5.75 percent.

●  Idaho reduced its top individual income and capital gains tax rate from 7.4 percent to 6.925 percent, with the corporate income and capital gains tax rates matching that change.

●  Indiana reduced its top corporate income and capital gains tax rate form 6 percent to 5.75 percent.

●  Kentucky reduced its personal income, individual capital gains, corporate income and corporate capital gains tax rates from 6 percent to 5 percent.

●  Missouri reduced its personal income and individual capital gains tax rate from 6 percent to 5.8 percent.

●  New Hampshire reduced its business income and capital gains tax rate from 8.2 percent to 7.7 percent.

●  North Carolina reduced its personal income and individual capital gains rate from 5.499 percent to 5.25 percent. In addition, the corporate income and capital gains tax rate was dropped from 3 percent to 2.5 percent.

●  Tennessee reduced its tax rate on dividends and interest from 3 percent to 2 percent.

●  Utah reduced its personal income, individual capital gains, corporate income and corporate capital gains tax rates from 5 percent to 4.95 percent.

●  Vermont reduced its personal income tax from 8.95 percent to 8.75 percent, and its individual capital gains tax rate from 5.37 percent to 5.25 percent.

In contrast, the following states made some significant changes that clearly worked to create more hostile policy environments:

●  New Jersey increased income tax rates across the board. The individual income and capital gains tax rate increased from 8.97 percent to 10.75 percent. And the top corporate income and capital gains tax rates jumped from 9.0 percent to 11.5 percent, which is now the highest state corporate tax rate among the 50 states.

●  Kansas increased its top personal income and individual capital gains tax rate from 5.2 percent to 5.7 percent.

●  New York increased its top corporate income and capital gains tax rate from 8.359 percent to 8.379 percent.

22 states saw their property tax burdens increase: Alabama, Arizona, Arkansas, Hawaii, Indiana, Iowa, Kentucky, Louisiana, Maine, Minnesota, Mississippi, Nebraska, New Hampshire, New Mexico, North Dakota, Oklahoma, Rhode Island, South Dakota, Texas, Vermont, West Virginia, and Wyoming.

19 states increased their minimum wage mandate: Alaska, Arizona, Arkansas, Colorado, Delaware, Florida, Maine, Maryland, Massachusetts, Minnesota, Missouri, New Jersey, New York, Ohio, Oregon, Rhode Island, South Dakota, Vermont and Washington.

Finally, while the Index each year is not strictly comparable to previous editions because measurements are changed, added and deleted, it is worth noting that for the first time in the history of the Index, California is not ranked dead last.

Now, California did not move up from 50 to 49 because of anything positive that California lawmakers did. Instead, New Jersey state lawmakers, led by Governor Phil Murphy, imposed such draconian cost increases that the Garden State has fallen to worst in the nation.

So, unless they explicitly opposed these additional burdens, if you hear New Jersey lawmakers talking about how much they love small business during National Small Business Week, don’t buy it.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

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