24 Oct 2022

Best and Worst States to Succeed in Business

Popular HGI Software

Amid Economic Uncertainty and Recession Fears, Where are Americans Most Likely to Succeed in Business?

Business leaders are grappling with a major shift in how – and where – Americans work, live and play, driven by high demand for workers, remote work flexibilities and other social and economic forces. They’re also coming off a summer marked by rising inflation and gas prices, which pinched Americans’ wallets and kept them away from big purchases.

As we head toward the end of 2022 and into 2023, the economic forecast in the U.S. remains mixed. Unemployment fell to 3.5%, the lowest level in 50 years. There are 10.1 million unfilled jobs in the U.S., which marks an unprecedented 14th straight month above 10 million. However, this is down 1.1 million from the previous month, which may signify a cooling of the job market as the Fed raises interest rates to curb inflation.

The good news for business owners is that the Consumer Confidence Index rose for the second consecutive month, meaning Americans are feeling more confident about their finances – and more willing to open their checkbooks. 

But the cost of doing business, and the payoff that comes with it, varies greatly across the country, with some states more friendly to business development than others in 2022.

Harrington Group International analyzed federal data to determine where businesses – and employees – are best off across all 50 states and Washington, D.C. 

We analyzed nine metrics divided across three categories: workforce and consumer habits; business culture; and financial climate. This included factors such as where educated workers are moving, the startup survival rate, GDP growth and income tax burden. You can find the full methodology at the bottom of the page.

Key findings:

  • The business environment isn’t so bleak at the national level. Employment has risen over the past year, at 4%, while more than a third of  business owners say their companies are doing better than usual and compared with a decade ago, startups are more likely to stay in business, with a five-year survival rate of 50.3%.
  • Overall, Florida, Texas and Tennessee are the best states for business, with above average growth rates for jobs and gross domestic product, strong consumer spending, influxes of educated workers and low levels of corporate and personal income taxes.
  • Meanwhile, New York, Illinois and Connecticut ranked last overall for a variety of reasons: No. 51 Connecticut has below average job growth and gets a larger share of its tax revenue from income taxes, while Illinois and New York are both losing educated workers to other states.

 

The United States of Business

Opening – and succeeding – in business is tricky, no matter the industry. So what are the local conditions needed for a business to thrive?

We’ll start with the obvious one: People. The job growth rate signals the kind of opportunities in a state, while educated workers’ willingness to relocate speaks to the quality of life. And residents’ buying habits for everything from dinners out to new cars gives clues on how cash flows in the local economy.

Across the U.S., employment rose by 4% in the year ending August 2022. Educated workers (adults 25 or older with at least some college education, an associate’s, bachelor’s or graduate degree) were most likely to stay put in 2021, but among those who moved, 53% moved within the same county, 25% moved elsewhere in the state and 22% moved to another state entirely.

Meanwhile, personal consumer spending jumped by 12.7% in 2021, reaching $47,915 per capita and about $15.9 trillion overall – a record high. A sustained increase in consumer spending can be troubling given its ties to inflation, but people’s willingness to spend money, and what they’re spending on, is considered a critical short-term measure of how the economy is doing overall.

Entrepreneurship culture is also an important indicator. Are new businesses cropping up in the state – and do they succeed over time, or go bust? And how do business owners themselves feel about the local economic climate?

Across the U.S., the rate of new business applications slowed over the past year, but just barely, at -.09%. Starting a new company is hard, but owners are just as likely to stick it out as they were in the past: As of March 2021, about half of startups that opened five years earlier were still in operation, a slightly higher rate than a decade earlier.

More recently, 36.5% of employers said their businesses were doing excellent or above average, translating to a performance index score of 56.4, according to a federal survey of roughly 200,000 single-location employer businesses in September.

Finally, we’ll look at the overall financial climate. Growth of the U.S. gross domestic product, a measure of the economy’s health over time, has slowed in the second quarter. Even so, Standard & Poor’s gives the country an AA+, its second-highest fiscal rating, which it reaffirmed in March despite concerns over inflation. Meanwhile, 46.9% of U.S. tax revenue comes from personal and corporate income taxes; at the state level, we view a lower income tax burden as better for business.

Best and Worst States

Florida is the best state to do business. In 2021, nearly 134,000 people with at least some college education moved to the Sunshine State, and the consumer spending and job growth rates are up year over year, too (15.6% and 4.9%, respectively). Florida also scores well on financial metrics, with a healthy S&P credit rating of AAA and just 6.9% of state tax revenue coming from corporate income taxes last year.

Notoriously, Texas has no personal or corporate income tax, helping it land the No. 2 spot. While the U.S. GDP fell by slightly in the second quarter, Texas’ annualized rate rose by 1.8%, and the number of jobs grew by 5.7% in the year ending in August 2022. But Texas lost points for its business growth rate, which was in the red: -7.3% compared with Florida’s 2.2% and No. 4 South Dakota’s 12.8%.

Tennessee (No. 3) and Idaho (No. 5) round out the top five best states for business. Company owners in Tennessee say business is booming, while educated workers are flocking to the state and S&P views its fiscal outlook as stable. In Idaho, 54.3% of startups survive at least five years – a higher rate than most other states – and consumer spending last year was up 16% over 2020.

Bringing up the rear, meanwhile, are Connecticut, Illinois, New York, Kansas and Washington, D.C., which rank as the top five worst places for business. In No. 51 Connecticut, annualized GDP fell by 4.7% in the second quarter, and 58.3% of state tax revenue comes from personal and corporate income, a greater share than most other states. S&P gave Illinois a BBB+ credit rating, which means it believes the Prairie State can meet its financial commitments, but it’s also the worst score among the states.

While No. 49 New York has a strong job growth rate of 4.7%, educated workers are fleeing the state – more than 162,000 left in 2021 – and consumer spending growth was slower than the national average. Kansas’ GDP fell this year and fewer businesses are opening in Washington, D.C., while startups are unlikely to survive in either place.

The Big Picture

Overall, most states have at least something to recommend them to business owners. Eight states had an above-average job growth rate, while seven saw double-digit percentage increases in new business growth. Twenty-eight states had more educated workers moving in than leaving, and 15 earned credit rankings of AAA, the highest score afforded by S&P.

States take a variety of approaches to make themselves appealing to employers, and this report doesn’t include every data point that could affect businesses. States with low income tax burdens, for example, levy other fees on employers. But for companies big and small – and for people looking to make a career move – a broad picture of the local environment can help them determine where to put down roots.

Methodology

We used federal data for nine metrics spanning three categories to determine the best and worst states for business. We used a Z-score distribution to scale each metric relative to the mean across all 50 states and Washington, D.C., and capped outliers at 3. We multiplied these scores by -1 if they were negatively associated with being above the national average, such as income tax burden and Standard & Poor’s credit ratings, which were converted to a numeric scale. A state’s overall ranking was calculated using its average Z-score across the nine metrics. Washington, D.C., was missing one data point (credit rating), so its overall Z-score is an average of the remaining eight metrics.
The metrics use the most recent data from publicly available sources. Here’s a closer look:

Workforce and Consumer Habits

  • Job growth: Year-over-year percent change in nonfarm employment from Aug. 2021-2022 (Bureau of Labor Statistics)
  • Educated worker mobility: Net migration in 2021 among workers with at least some college, an associate's, bachelor's or graduate degree (Census Bureau)
  • Consumer spending: Year-over-year percent change in personal consumer spending, 2020-2021 (Bureau of Economic Analysis)

 

Business Culture

  • Business growth rate: Year-over-year change in new business applications from Sept. 2021-2022 (Census Bureau)
  • Startup survival rate: Share of businesses that opened in the year ending March 2016 and were still operating as of March 2021 (Bureau of Labor Statistics)
  • Business self-assessment: Index score derived from a Sept. 2022 federal survey of recent performance among about 200,000 businesses nationwide (Census Bureau)

 

Financial Climate

  • GDP growth: Percent change in state gross domestic product at annual rate, Q1-Q2 2022 (Bureau of Economic Analysis)
  • Credit rating: State ratings as of Oct. 2022 were converted to numeric values, with 1 equivalent to a AAA rating, 2 equivalent to AA+ and so on (Standard & Poor’s)

Income tax burden: Share of state tax revenue that came from corporate and personal income taxes in 2021 (Census Bureau)