Another Triumph for Texas: Best/Worst States for Business 2012

Click here to see the Best/Worst States for Business 2013

Click here to see a slideshow of the 10 Best States for Business in 2012
Click here to see a slideshow of the 10 Worst States for Business in 2012

In Chief Executive’s eighth annual survey of CEO opinion of Best and Worst States in which to do business, Texas easily clinched the No. 1 rank, the eighth successive time it has done so. California earns the dubious honor of being ranked dead last for the eighth consecutive year.

This year, 650 business leaders responded to our annual survey, up from 550 in 2011. CEOs were asked to grade states in which they do business among a variety of areas, including tax and regulation, quality of workforce and living environment. The Lone Star State was given high marks foremost for its business-friendly tax and regulatory environment. But its workforce quality, second only to Utah’s, is also highly regarded.

Florida moved up from number three last year to number two. Last year, Florida Gov. Rick Scott penned a tongue-in-cheek letter to Texas Gov. Rick Perry, warning him that Florida is coming after the Lone Star State’s top ranking. Since Scott took office, his administration has enacted business tax and regulatory reforms that have contributed to the creation of more than 140,000 private sector jobs and an unemployment drop of 2.1 percentage points last year—one of the biggest decreases in the nation.

It is perhaps no coincidence that Texas and Florida have the highest net migration of people to their states from 2001 to 2009. (By contrast, New York and California lost over 1.6 million and 1.5 million in net migration out of the states, respectively, over the same period.) People migrate in search of employment, but this can cut both ways. Texas is justly proud of adding to its employment numbers, something Gov. Perry cited numerous times during his brief campaign for the Republican Presidential nomination. Between June 2009—which marked the official end of the recession—and July 2011, the number of jobs increased in the state by 328,000. Nationally, the job growth in that time period was 697,000 according to figures from the Bureau of Labor Statistics. This translates to Texas jobs making up 47 percent of the national net job creation. However, neither Texas, nor the nation, is adding jobs at a pace fast enough to bring down unemployment to historically normal levels. And Texas’ unemployment rate—while still below the national average—is now higher than that of 26 states.

North Carolina, Tennessee, Indiana, Virginia, South Carolina, Georgia and Utah held their positions in the top 10, with Indiana moving up a notch to fifth. CEOs indicate that workforce quality is the state’s single greatest strength, and since it became the 23rd right-to-work state last year, the Hoosier State is likely to punch above its weight competitively in the future. “Indiana is like a breath of fresh air,” volunteered one manufacturing CEO. “I have operated on both coasts, the Southeast and Chicago, and Indiana is where I will keep my manufacturing operations.”

It may be no accident that most of the states in the top 20 are also right-to-work states, as labor force flexibility is highly sought after when a business seeks a location. Several economists, most notably Ohio State’s Richard Vedder and Harvard’s Robert Barro, have found that the economies in R-to-W areas grow faster than other states, have higher employment and attract more inward migration. Governor Scott Walker’s battle with the unions in Wisconsin (See “Will Wisconsin Rise Again?”), a state that edged into the top 20 this year for this first time, demonstrates that the struggle for a pro-growth agenda can be contentious. As one Badger State business leader remarked, “Finally, Wisconsin is headed in the right direction.”

Although often eclipsed by Texas, its next door neighbor, Louisiana, is the Cinderella of business improvement. In 2006, it ranked 47th—where Massachusetts is today. And Katrina didn’t help matters. But since then it has climbed steadily up the ranks so that it is now 13th—up from 27th last year—the biggest leap in a single year of any state. “In Louisiana there is an active government push to reduce taxes and regulation and to encourage new industry to relocate to the state,” commented one chairman. “This was valuable for one of our companies, which decided to make the state our headquarters.” Other chiefs point to the big strides the state has made in workforce training and economic incentives. Its economic development office is also aggressive in luring disaffected businesses from the Northeast and California.

“I have operated on both coasts… and Indiana is where I will keep my manufacturing operations.”

California’s enduring place of perpetual decline continues in this year’s ranking. Once the most attractive business environment, the Golden State appears to slip deeper into the ninth circle of business hell. The economy, which used to outperform the rest of the country, now substantially underperforms. And its status as the most ruinously contentious place to operate remains undisturbed in eight years. Its unemployment rate, at 10.9 percent, is higher than every other state except Nevada and Rhode Island. With 12 percent of America’s population, California has one-third of the nation’s welfare recipients. Each year, the evidence that businesses are leaving California or avoid locating there because of the high cost of doing business due to excessive state taxes and stringent regulations, grows. (See “Eastward Ho!”) According to Spectrum Location Solutions, 254 California companies moved some or all of their work and jobs out of state in 2011, an increase of 26 percent over the previous year and five times as many as in 2009.

The following is a representative sample of comments from participating CEOs:

• California is the worst! They are doing everything possible to drive a business out of their state. If it were not for the climate, they would have lost half their population.
• California regulations, taxes and costs will leave only tech, life sciences and entertainment as viable. If you aren’t an elitist, no room here for the middle or working classes.
• California treats business owners like criminals. California has different overtime policies for its own employees vs. private sector.
• California’s labor regulation is a job killer. We will be moving our business out of the state, which will lose hundreds of jobs simply due to the poor regulatory environment.
• California should secede from the union—it is like doing business in a foreign country, it has its own exchange rate, and its regulation is crazy.

Although Gov. Jerry Brown deserves credit for some spending cuts, his proposed budget promises more out-of-control spending financed with higher personal income taxes. It’s little wonder that most Silicon Valley CEOs say they won’t expand in California because of high taxes and burdensome regulation. Intel long ago moved its plants to Nevada, and Cisco, Google and others have located their server farms to places like Utah, Arizona and Oregon. California still ranks first in technology, agriculture and entertainment, but even this advantage in time can be undermined.

Once near the bottom of the Best and Worst rankings, New Jersey has made some progress in the eyes of business leaders, but it still has a long way to go. It has moved up to 45th from 47th owing in no small measure to Gov. Chris Christie’s attempt to reverse what he calls a “failed experiment” in raising taxes and increasing regulation. Some CEOs applaud his move to phase in tax cuts, but many complain that its regulatory and permitting bureaucracy remains burdensome. Similarly, New York is given credit for moving in the right direction, but most warn that there is much room for improvement. Gov. Andrew Cuomo’s much-touted state pension reform, for example, is far less daring than advertised, leaving the governor to bump up the top income tax rate to 8.82 percent. In New York City, citizens face a staggering 12.7 percent rate.

It’s clear that most states recognize they have an opportunity to compete by adjusting their tax and regulatory regimes, but above all what attracts business leaders’ attention is a cooperative attitude and a willingness to work with the private sector. “A good state is one that actively encourages competitive business, demands low relative taxes and has a highly educated workforce,” commented a CEO respondent. “After all, we’re the ones who create the jobs.”

See the full grades for each state

Texas Big Company Wins

• Allstate, builds $12 million customer center in San Antonio. Reasons: Weather and lifestyle, plus Spanish-language capabilities.
• Caterpillar, building plants in Seguin and Victoria. Reasons: Access to cheaper, non-union labor; proximity to ports for exporting.
• eBay/Pay Pal, hiring more than 1,000 and expanding support facilities in Austin. Reasons: Access to tech talent, $2.8 million from the Texas Enterprise Fund.
• Facebook opens first U.S. operation outside of California, in Austin. Reasons: Access to creative and technical talent.
• GE Transportation, announces $96 million locomotive plant in Fort Worth. Reason: Cheaper, non-union labor
• Grifols USA, California-based subsidiary of Spanish parent, opens blood plasma testing facility San Marcos. Reason: Right skills sets, languages
• PETCO, in San Diego, opened its first customer support center outside of California in San Antonio in 2011. Reason: Access to cheaper space, skilled workers, funding from the Texas Enterprise Fund.