2014 Best & Worst States for Business: Texas Rides High Again

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In the 10th annual survey of CEOs concerning their views of the best and worst states for business, over 500 CEOs across the U.S. responded. Business leaders were asked to grade states with which they were familiar on a variety of measures that CEOs themselves have said are critical. These include the tax and regulatory regime, the quality of the workforce and the quality of the living environment. For example, a state’s attitude toward business is viewed as a critical component of its tax and regulatory regime, while employees’ attitude toward management is considered a crucial factor in the perceived quality of a region’s workforce. Public education and health are also important factors in the living environment, as are such things as cost of living and affordable housing.

Texas continues its 10-year historical position as the best state overall; but Florida, which ranks No. 2, is edging up and even overtaking Texas in its quality of living environment. “We’ve learned from Texas how to tell our story better and it helps that we’ve cut taxes 25 times—about $400 million,” Florida Governor Rick Scott told Chief Executive. Scott points to what he calls the Jim Collins “flywheel effect” where momentum is generated as more big name companies invest in his state. “When companies like Hertz, Amazon, Deutsche Bank and Verizon add jobs here, it causes more people to look at us. Business is comfortable that we’ll keep the tax base low and improve our workforce.”

Tennessee edged out North Carolina to take third place with North and South Carolina respectively capturing 4th and 5th place. Indiana, Arizona and Nevada finished 6th through 8th, respectively. Having jumped 31 positions from 40th in 2010 to No. 9 this year, Louisiana is the Cinderella state of Chief Executive’s ranking, proving that a concerted effort to transform old habits and policies can truly pay off. Wisconsin comes close with a meteoric thrust from 41st five years ago to 14th in 2014. Having survived a bitter recall last year, Wisconsin Governor Scott Walker recently signed Senate Bill 1, legislation that provides $504 million in tax relief over the next two years to state taxpayers. The bill reduces income- and property-tax rates, as well as eliminates income-tax rates for manufacturers, making the Badger state even more competitive.

Likewise, Ohio has seen dramatic improvement due, in part, to an energetic governor in former congressman John Kasich, who, like Walker, pushed a vigorous turnaround. During his tenure, Ohio became the No. 5 job creator in the nation and No. 1 in the Midwest. Unemployment is now 6.5 percent, the lowest in Ohio since June of 2008. Likewise, Ohio has gone from an $8 billion deficit to a $1.5 billion surplus over the same period.

California, New York and Illinois continue to rank among the worst three states in 2014, with virtually no change from previous years. California has gained breathing space since Governor Jerry Brown took office and is credited with a budget surplus. But despite the return of fiscal discipline, it has exchanged acute problems for merely chronic ones. It is a state that continues high personal income tax rates and regulates with a very heavy hand. Its top, marginal tax rate of 33 percent is the third-highest tax rate in the industrialized world, behind only Denmark and France. This situation creates a bias against savings, slows economic growth and harms competitiveness.

The Economist reports that it takes two years to open a new restaurant in the Golden State compared to six to eight weeks in Texas. The task of unraveling the byzantine layers of regulations seems insurmountable. The jungle is too thick to be pruned. That’s why Carpinteria, California CKE Restaurants (owner of Carl’s Jr.), is committed to opening 300 restaurants in Texas, but has no plans for new restaurants in California. According to Dun & Bradstreet, 2,565 California businesses with three or more employees have relocated to other states between January 2007 and 2011, and 109,000 jobs left with those employers. As one CEO commented, “personal income tax rates and too much ‘big government’ regulation…public employee unions dominate California to its detriment.”

The state is justly famed for its natural beauty, exceptional universities and high-tech clusters, but consider that one of its best-known tech firms, Palo Alto-based Tesla, is looking elsewhere to build its $5 billion “gigafactory” battery plant. California’s real estate is simply too expensive; and because its taxes are higher, general costs of living are higher. As a result, wages have to be higher, as well. The state is also known for policing companies more heavily than just about any other state—and sometimes more than the federal government.

California likes to say that Texas can have all those low-wage jobs,” says Richard Fisher, CEO of the Dallas Federal Reserve, “but from 2000 to 2012, job growth percentage change by wage quartile was better in Texas.” Texas won another bragging right last February when SiteSelectionmagazine reported that it surpassed California in global technology exports in 2012.

If there is a pattern in the survey, it is that states have diverged in recent years in their experimentation with economic freedom. Those lightening the burden of government have generally improved economic growth over those insisting that state-directed spending and governance is best. Apart from their geographic locations, many states are similar; and thus, they offer a natural experiment in economic policy.

John Hood, president of the John Locke Foundation, a state policy think tank in North Carolina, points to numerous academic research studies that compare such policies over time. Writing in Reason, he cites 112 studies that examined high, overall state and local tax burdens and found that 72 of them—64 percent—showed a negative association with economic performance. Some analysts counter that isolating variables, such as high taxes, misses the point. States are better served, they argue, when they increase tax burdens to “invest” in education, infrastructure or other government programs.

Hood counters that this may seem plausible in theory but almost never works out this way. Of 43 studies testing the relationship between total state and local spending and economic growth, he says only five concluded it was positive.

Sixteen found a negative correlation and the rest were inconclusive. The problem is that states don’t invest effectively. States like Texas, Florida, Tennessee, North Carolina and South Carolina, Indiana and others have figured out that economic freedom works. Economists who create the Fraser Institute’s Economic Freedom of North America index examined state economic growth from 1981 to 2009. They found that if a state adopts fiscal and regulatory policies sufficient to improve its  economic  freedom  score  by  one  point,  it  can  expect unemployment to drop by 1.3 percentage points and labor-force participation to rise by 1.9 percentage points.

The question is why have states nearer the bottom of the ranking not acted on this insight? The answer is likely complicated, but it has much to do with power and control. There will always be leaders who have convinced themselves that they act from superior knowledge and wisdom. And such figures have their adherents. However, business leaders are not bound to indulge such delusions and neither do citizens who continue to vote with their feet and abandon such states for friendlier places.

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" J.P. Donlon : J.P. Donlon is Editor Emeritus of Chief Executive magazine.."