Index Shows Impact of State Policies on Small Businesses

Published January 1, 2006

Virtually all politicians say they support entrepreneurs and small businesses. But how does the political rhetoric match policy reality?

The Small Business & Entrepreneurship Council (SBEC) suggested the answer in its annual “Small Business Survival Index,” the 10th edition of which was published in October. (The report was written by the author of this article.)

The Small Business Survival Index focuses on the costs inflicted by state and local governments on small businesses. It offers a comparative measure of the public policy climate for entrepreneurship among the 50 states and District of Columbia.

For the 2005 edition, the index was expanded to cover 26 different government-imposed or government-related costs, including personal income, capital gains, and corporate income tax rates; property and consumption-based taxes; death taxes; unemployment taxes and workers’ compensation costs; various health care mandates and regulations; gas taxes; state minimum wages set above the federal wage mandate; and state legal liability costs, among others.

Population Shifts to Best States

Population trends show how important a healthy small business climate can be to the economic well-being of individuals. The bulk of new jobs are created by small businesses, and from 2000 to 2004, population growth was 56 percent faster in the best 25 states than in the worst 26 states (including the District of Columbia), according to the index.

Equally interesting is net domestic or internal migration–the movement of people among the states after factoring out births, deaths, and international immigration. From 2000 to 2004, the top 25 states on the Small Business Survival Index netted a 1.64 million increase in population at the expense of the bottom 25 states and District of Columbia.

Only eight states among the top 25 experienced negative net internal migration over this period, versus 16 states in the bottom 25 plus D.C.

Job Growth Also Higher

From January 1995 to August 2005, job growth (based on seasonally adjusted data) was 24 percent faster in the top 25 index states compared to the lower 26.

In the past two years, as the economic recovery stepped up its pace, the difference in the rate of job growth was substantial. From August 2003 to August 2005, the top 25 states on the index created jobs at a 38 percent faster pace than the lower 25 states plus D.C.

Small Business Survival Index (SBSI) 2005
State Rankings
Rank State SBSI Rank State SBSI Rank State SBSI
1 South Dakota 24.280 18 Missouri 44.976 35 Louisiana 51.550
2 Nevada 27.080 19 Idaho 45.020 36 Connecticut 51.830
3 Wyoming 33.360 20 New Hampshire 45.030 37 Oregon 52.980
4 Washington 37.430 21 Alaska 45.140 38 Montana 53.448
5 Michigan 37.490 22 Georgia 45.555 39 North Carolina 53.851
6 Florida 38.525 23 Illinois 45.730 40 Ohio 54.210
7 Mississippi 38.970 24 Delaware 45.830 41 Iowa 54.317
8 Alabama 39.465 25 Maryland 46.445 41 Iowa 54.317
9 Indiana 40.140 26 North Dakota 46.690 43 Vermont 56.720
10 Colorado 41.190 27 Wisconsin 47.539 44 New York 58.191
11 Texas 41.210 28 Kentucky 47.605 45 New Jersey 58.905
12 South Carolina 41.790 29 Oklahoma 48.110 46 Hawaii 60.300
13 Virginia 41.885 30 Utah 48.515 47 Minnesota 60.360
14 Pennsylvania 42.261 31 Kansas 50.000 48 Rhode Island 60.390
15 Tennessee 43.090 32 Nebraska 50.493 49 Maine 61.069
16 Arkansas 43.832 33 New Mexico 50.620 50 California 62.520
17 Arizona 44.238 34 West Virginia 50.805 51 Dist. of Columbia 73.330

Raymond J. Keating ([email protected]) is chief economist for the Washington, DC-based Small Business & Entrepreneurship Council and author of the “Small Business Survival Index.”


For more information …

The 10th edition of the 35-page “Small Business Survival Index” can be downloaded from the Small Business & Entrepreneurship Council’s Web site at http://www.sbecouncil.org.