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The 7 Worst States To Start a Business

Posted on 15 April 2009

There are many reasons why you would want to start a business in one state rather than another. But the reasons are probably going to fall into two broad categories: First, what does that state’s economic environment offer in terms of things that will help your business be successful? This could be a highly educated workforce, excellent telecommunications infrastructure, a network of other successful businesspeople, and many other factors. Second, what factors does the statebusiness off the ground? This could be high taxes, high crime, or high regulatory barriers to starting a business. have that would hurt your chances of being successful or even getting your

U.S. News decided to find the states that offer the least helpful environment, and also do the most to harm business people through interference. What states are lagging in the economic advantages that entrepreneurs can use to create successful businesses? What state governments overreach in the costs they impose on businesses? We consulted two recent comprehensive studies that take completely different approaches to measuring the friendliness of the 50 states 2008 New State Economy Index, by the Kauffman Foundation and the Information Technology and Innovation Foundation, and the Small Business Survival Index 2008, by the Small Business and Entrepreneurship Council.

1. West Virginia

West Virginia has not been known for economic prosperity in recent decades. It consistently ranks as one of states with the lowest per capita income. So it shouldn’t be surprising that the Kauffman Foundation ranks West Virginia 49th out of 50 states in its preparation for the economic trends that will propel entrepreneurs in the 21st century. It’s harder to find highly-educated people to hire in West Virginia than in other parts of the country; it ranks last among the 50 states in workers with advanced degrees or some kind of higher education attainment. Perhaps not coincidentally, the state also ranks last in the number of entrepreneurs starting new businesses.

Another factor in West Virginia’s low level of entrepreneurial activity might its high level of taxation. According to the SBEC’s index, West Virginia is in the top 20 percent of states based on how high their corporate income and corporate capital gains tax rates are, and in the top 50 percent for individual income and capital gains tax rates.

2. Iowa

Politically, Iowa is a hard state to pin down. It is known for a progressive streak, but also has a strong conservative voting bloc that voted for George W. Bush in 2004 (although the state went for Barack Obama in 2008). Iowa’s strong “purple” nature might explain why it ranks so poorly as a state in which to start a business. It seems to have the worst impulses of its conservative and liberal tendencies–relatively low investment in the things that make entrepreneurs succeed, and high government interference. For the latter, Iowa has very high capital gains taxes and corporate income taxes, and is also one of the worst states for unemployment taxes on wages. In terms of investment, Iowa is 46th out of the states for adoption of broadband telecommunications services, and the speed of those services.

3. Arkansas

The Arkansas state government spends a lot of money. From 2000 to 2006, it had the ninth-highest increase in per capita state and local expenditures. Much of that money comes from sales and excise taxes, of which Arkansas has some of the highest in the country. But wherever all this money is going, it does not seem to be making Arkansas a better state for entrepreneurial innovation. It is not attracting knowledge workers–it ranks last among the states for the educational attainment of recent migrants from other parts of the US. This relative lack of knowledge workers might be why Arkansas also ranks last for the number of inventor patents per capita.

4. Maine

Maine is by no means a poor state. Its per capita income is moderate compared to other states. Relative economic prosperity, however, does not necessarily mean a state is a good one in which to start a business. That’s because, while not poor, Maine’s economy is not dynamic either. It ranks 42nd in terms of fastest-growing firms. Maine ranks even lower for “gazelle jobs” as a share of total employment–these are jobs at firms with annual sales revenues that have grown 20 percent or more for four straight years.

So a new business in Maine isn’t likely to be a national success story. It will also have to deal with high taxes. Maine has the second-highest property taxes in the country, and its personal income and individual capital gains taxes are almost as high.

5. Hawaii

At more than 15 percent, Hawaii’s percentage of residents who are foreign-born is one of the highest in the country. So it might be surprising that Hawaii’s economy is not more globalized. It ranks third-to-last among the states in terms of the export focus of its manufacturing and service sectors. That means that Hawaii is not very plugged in to the global markets that have been –and will continue to be–a boon for entrepreneurs. Another area where Hawaii is being left behind is with jobs at gazelle firms. It ranks third-to-last there, as well.

What might be restricting Hawaii’s ability to adapt? It is the worst state in the country for high sales, gross receipts, and excise taxes, according to the SBEC.

6. Kentucky

Kentucky ranks poorly as a state to start a business because it suffers similar deficiencies in education as West Virginia. The Bluegrass State has the 46th least-educated workforce in the country. That means there’s also a lack of technological innovation in the state–Kentucky ranks third-to-last in inventor patents. Kentucky fares better on the question of government interference with businesses. It has relatively low corporate taxes. It ranks, however, in the top half of states for high excise and personal income taxes.

7. Montana

Montana’s people might be known for their rugged, don’t-tread-on-me attitude. But the state’s government does tread on people who want to start businesses. Montana has the highest worker’s compensation costs in the country and is in the top ten of states for high unemployment taxes. In addition, Montana’s individual tax rates are higher than average.

Among problems with Montana’s economic landscape are the productivity of its manufacturing sector and foreign direct investment. It ranks dead last in both.

So what are the Top 10  Best states to Start a Business?

The Small Business & Entrepreneurship Council (SBE Council) released its 13th annual rankings of the states according to their public policy climates for small business and entrepreneurship in the “Small Business Survival Index 2008: Ranking the Policy Environment for Entrepreneurship Across the Nation.”

SBE Council chief economist Raymond J. Keating, author of the study, said: “The U.S. economy is in a serious downturn, and the outlook for a robust recovery seems remote. That means state and local policymakers face some very difficult decisions, especially on budget matters. Depending on the policy course that state lawmakers choose, they can either make the economic situation in their own state better or far worse.”

In terms of their policy environments, the most entrepreneur-friendly states under the “Small Business Survival Index 2008” are:

1) South Dakota

2) Nevada

3) Wyoming

4) Florida

5) Washington

6) Texas

7) South Carolina

8) Alabama

9) Virginia

10) Colorado