States More Aggressive in Competing With One Another

In its ninth annual survey of CEO opinion about the best and worst states in which to do business, 736 CEOs—the highest response on record—rendered their verdict. Business leaders were asked to grade states with which they are familiar on a variety of competitive metrics that CEOs themselves regard as critical. These include: 1) taxation and regulation; 2) quality of workforce; and 3) living environment. The tax and regulatory grade includes a measure of how CEOs grade a state’s attitude toward business, a key indicator.

In the minds of most leaders, a state’s friendliness is closely aligned with its tax and regulatory regime. Similarly, workforce quality also measures the perceived cooperativeness of workers with management, as well as the people’s general work ethic and education attainment. The living environment metric measures the perceived quality of education and public health facilities, as well as the affordability and quality of real estate, the transportation system and related environmental factors.

For the ninth consecutive year, the Lone Star state continues to rank first, with the Golden State continuing to rank dead last. Florida, North Carolina, Tennessee and Indiana place second through fifth respectively—unchanged from last year’s ranking—while Arizona elbows its way into sixth place, up from 10th place in 2012. Virginia and South Carolina follow, with Nevada moving into a solid ninth place up from 12th in 2012. The most dramatic ranking change was scored by Ohio, which moved up 13 places, and by Delaware, which dropped 13 places. Louisiana, Wisconsin, Kansas, Montana and Minnesota also advanced in the rankings since 2012.

Simply put, “a good state is one that understands the private sector pays for the public sector and makes it easy for the private sector to conduct business and grow,”remarks David N. Willis, CEO of CRW Parts, a Baltimore wholesale distribution firm. “California, New York and Illinois have high costs of living, high taxes and high regulation,” says Mark Larsen, CEO of Maxxcap Group, a mid-size financial services firm. Additionally, each of these states makes it difficult, and often worse, than other places to do business. By contrast, “states like Texas and Ohio are consistently trying to help us grow our business and are listening to the leaders of companies to help solve problems,” says Toledo-based Impact Products CEO Terry Neal.

More and more states are getting the pro-growth message. Wisconsin governor Scott Walker’s position is typical of this new thinking. “I’ve never seen a store get more customers by raising its prices, but I’ve seen customers knock down doors when they cut prices,” he says. News that Michigan became the nation’s 24th right-to-work (RTW) state sent a message and a warning to other states. [See “Is Right to Work the Right Move?”] When neighboring Indiana became a RTW state, Caterpillar announced that it would move its London, Ontario plant to Muncie.

The federal government may be a tax reform wasteland but the states are out there competing with gloves off. Nine states, including top-ranked places like Texas, Florida and Tennessee have no income tax. Oklahoma and Kansas have lowered theirs. Indiana Governor Mike Pence has called for a 10 percent cut. The governors of New Mexico, Nebraska and North Carolina have prioritized tax reform. Then there’s Louisiana’s Bobby Jindal, who wants to eliminate his state’s corporate tax and replace it by raising the state’s current 4 percent sales tax. Louisiana has come a long way since 2006 when it ranked 47th.

“A lot of states are making strides in moving towards more favorable business climates,” offers Stephen Maher, principal of RMA, an architecture firm with offices in Brookline, Massachusetts and Mumbai. “Louisiana has made strong strides in this direction and is still pushing. Texas has been there for years…others are being left behind.”

CEOs are well disposed to Texas, and it’s not hard to understand why. Fifty-two Fortune 500 companies now call Texas home. Fifteen Texas companies went public in 2011, making the state the hottest IPO market in the nation. Austin has become one of the fastest growing tech hubs. (The A5 chips in Apple’s iPhones and iPads are made in Austin.) Young programmers and engineers can actually afford to live well in Austin, where the housing cost index is 300 percent lower than in San Francisco. Texas job creation has outpaced the national average, too. Writing in Investors Business Daily, Wendell Cox commented that, “the number of jobs in Texas has grown by a truly impressive 31.5 percent since 1995, compared with just 12 percent nationwide, according to BLS data. Texas lapped California, an important economic rival and the only state with a larger population.” In addition, Texas jobs pay well and employees there fared better than the rest of the U.S. from 2002 to 2011, according BLS data. Adjusted for cost of living, Texas’ per capita income is higher than California’s and nearly as high as New York’s, observes Cox, who is principal of Demographia, a consultancy.

2013 Best & Worst States for Business Links

2013 Best & Worst States for Business – Homepage
States More Aggressive in Competing With One Another
California Dreaming
Playing the Incentives Game
8 State Advocate CEOs
How CEOs Grade the States
Click here to see a slideshow of the 10 Best States for Business in 2013
Click here to see a slideshow of the 10 Worst States for Business in 2013

“Moved from California to Texas for personal and business benefit,” quips Omnific Advertising owner Don Glacy. “Best decision I’ve made.”

“California is a nightmare for business,” adds George Benjamin, chairman of West Melbourne, Florida-based Relm Wireless. Citing onerous regulations, escalating taxes and, above all, a hostile attitude toward business, a number of California survey respondents, who asked not to be identified, indicated that they intend to move most or all of their operations to other states, with Texas, Arizona and Nevada leading the list. (See “California Dreaming”)

Intel CEO Paul Otellini told Venture Capital Dispatch last October that California was on a downhill slide. The San Francisco native and fifth generation Californian said, “I would like to be bullish, but I worry that we have to hit the abyss before we can fix things; I worry the abyss will be more like Greece.” Otellini added that Intel had not added a job in California in 10 or 12 years and closed its last factory in the state six years ago. Governor Jerry Brown’s so-called balanced budget does nothing to lesson Sacramento’s voracious spending appetite. The state, as The Los Angeles Times reported: “owes Wall Street more per resident than almost every other state. It has also accumulated a crushing load of debt for retiree pensions and health care, now totaling more than taxpayers spend each year on all state programs combined.”

While not yet overtaking the Lone Star state, Florida has shaved some of the distance between itself and Texas across the three major indices of the CEO survey. “Florida has gained significant momentum with the new governor, who actually has manufacturing on the top priority list of his agenda,” says Hannes Hunschofsky, president of Hoerbiger Corp of America, a German industrial manufacturer with its U.S. base in Pompano, Florida. A former CEO himself (of Columbia HCA), governor Rick Scott has made it his priority to streamline state government, reducing 2,300 needless regulations and 12,000 government positions. Under two years of Scott’s policies, 282,000 private sector jobs have been created; in the previous four years the state had lost 825,000 jobs. The past two years have set records for tourism, Florida’s biggest industry. In 2012, 89.3 million people visited Florida; up 2.3 percent from the previous record-setting year.

Scott cut property taxes by more than $210 million and eliminated the state tax for 63 percent of the businesses that paid it when he was elected. He is doubling down in the current legislative session by proposing to eliminate the tax for all manufacturing companies—which would mean that 70 percent of all Florida businesses would no longer pay the tax. He intends to grow that figure to 100 percent. Personal income has also risen by 6.6 percent in Florida since Scott took office, going against a national trend where family incomes have been stretched razor thin.

Better than California, New York nonetheless continues its lackluster performance in the minds of most business leaders. The unemployment rate has risen to 8.4 percent from 8.2 percent since governor Cuomo took office two years ago. Cuomo’s 8.82 percent “temporary” tax rate on incomes above $1 million might as well be permanent. Millionaires pay a higher rate in Manhattan—12.46 percent—than anywhere else in the nation except California. The Tax Foundation reckons that New York has the highest state and local burden and the worst business climate in the U.S. Perhaps this is why 1.6 million New Yorkers have left the state over the last decade, according to the Empire Center for New York State Policy.

New York is not alone in its misery. Massachusetts, Connecticut and most Northeastern states get a black eye for regulatory bureaucracy and high taxes. But Illinois stands apart. “It’s a complete and utter disaster when it comes to fiscal management,” says the CEO of a Chicago pharmaceutical company. “The inability to address key issues that are driving debt and instead increasing the tax burden on businesses and residents is mind-boggling. This is precisely why I intend to move my company to Florida or Tennessee.” Four recent Illinois governors have gone to prison, Rod Blagojevich being the most recent, suggesting to Stephen Hicks, who runs a web site on state developments, that the state should have a new motto: Illinois: Where governors go to jail and business can go to hell.

At the center of the survey results are two developments. In the midst of a sluggish recovery where every job counts and every job creator counts for even more, states that tax less and regulate with a lighter touch tend to grow more and attract more business. (See American Legislative Exchange Council’s “Rich States, Poor States.”) For their part, CEOs realize that in an age of mobility and advanced communications, one’s operations can be based anywhere. Twenty years ago, Walter Wriston, the legendary Citibank leader and international banker, said that international capital is drawn to places where it is well treated. That goes for domestic investment too. Politicians who think that their state’s legacy advantages will carry them indefinitely into the future are in for a nasty surprise.

See the full grades for each state

BIGGEST GAINS FROM 2012
2013 RANK STATE 2012 RANK CHANGE
22 Ohio 35 13
30 Minnesota 36 6
16 Alabama 10 4
6 Arizona 10 4
19 Kansas 24 4

 

BIGGEST LOSSES FROM 2012
2013 RANK STATE 2012 RANK CHANGE
27 Delaware 14 -13
38 Mississippi 30 -8
31 Missouri 24 -7
29 Kentucky 25 -4
20 Wyoming 16 -4

 

BIGGEST GAINS FROM 2009
2013
RANK
STATE 2009
RANK
CHANGE
13 Louisiana 45 32
20 Wisconsin 43 23
30 Mississippi 44 14
16 Wyoming 25 9
2 Florida 10 8

 

BIGGEST LOSSES FROM 2009
2013
RANK
STATE 2009
RANK
CHANGE
40 Oregon 24 -16
27 Delaware 12 -15
42 Pennsylvania 29 -13
41 Maryland 31 -10
33 Alaska 25 -8

 

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