The Winning States’ Proven Formula

In our 12th annual canvas of CEO opinion, leaders favor states with fewer regulatory encumbrances and report that most remedies dangled by politicians only make things worse.

Even allowing for geographic location and weather patterns that are immutable, state economic conditions vary widely. The evidence suggests that pro-growth policies influence perceptions of competitiveness, particularly in the eyes of business leaders. Earlier this year, Chief Executive asked 513 CEOs to rank states they are familiar with on the friendliness of their tax and regulatory regime, workforce quality and living environment. (This latter category includes not just the cost of living but the education system and the state and local attitudes toward business).

Texas and Florida top the list, as they have every year for the past 12 years that we have conducted this survey. Despite having been hit hard by the shale energy bust, Texas is still held in high esteem by CEOs for its favorable economic reforms. But each year, Florida steadily edges up in the qualitative measures. The Sunshine State added 1 million private-sector jobs over the last five years, cut taxes 50 times and got rid of 4,200 burdensome regulations. In 2014, it surpassed New York as the third-biggest state for companies to flourish.

“Florida added 1 million private-sector jobs over the last 5 years, cut taxes 50 times and eliminated 4,200 regulations.”

North Carolina and Tennessee held onto their third and fourth places from last year, while Indiana moved up to fifth place and Arizona leapfrogged from ninth to sixth. South Carolina secured seventh place (up from 10th last year) while Georgia, Nevada and Ohio ranked eighth, ninth and tenth respectively.

The fact that the Buckeye State surged from 22nd place to 10th this year may have something to do with the fact that Ohio has added 350,000 jobs since 2011, and Governor John Kasich reduced taxes by $4.8 billion, which The Washington Post says puts Ohio among the top four tax-cutting states in the U.S.

In this year’s survey, we also asked CEOs who operate directly from a state whether they view it as better or worse than leaders with indirect experience. For the most part, the perceptions of CEOs with firsthand experience do not differ widely from overall perceptions of CEOs. There are some exceptions: Hawaii-, Alabama- and Mississippi-based leaders tend to rank their states as more friendly than do CEOs overall. Minnesota, Utah and Pennsylvania, on the other hand, get lower marks from CEOs with firsthand knowledge than from those without direct experience. Louisiana, which once ranked among the top 10, dropped to 37th place, no doubt owing to its current $940 million budget disaster. Last January, John Bel Edwards, Louisiana’s new Democratic governor, said he learned of various “devastating facts” and decried sales of state assets to plug a $2 billion budget gap.

MOVING ON UP
As important as taxes and regulation are, they aren’t the only factor influencing a region’s attractiveness. Migration between states illustrates favorable intrinsic conditions, as well as wise policy decisions. From 1992 to 2011, some 62 million taxpayers changed their state of residence, according to IRS records. Estimates suggest this figure is more than the total populations of New York, Illinois and Florida combined. This trend of people voting with their feet has benefited North Carolina, Florida and Texas—all three of which are among the top 10 best states this year—as well as states like Utah and Wyoming.

The population losers tend to be the Rust Belt and Northeastern states like New York, Connecticut and New Jersey. Having said this, states such as Indiana, Ohio, Wisconsin and Michigan deserve credit for pro-growth policy reforms in the wake of years of poor policy decisions.

CEOs indicate that the quality of workforce is just as important—in some cases more important than the tax environment. (Utah and Nebraska score highest in workforce quality among all the states.) At $117 billion GE, CEO Jeff Immelt moved the industrial giant’s headquarters from Fairfield, Connecticut to Boston because he felt that the city would give GE access to the advanced thinking and talent afforded by an area with many top universities and colleges offering technical training.

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“I would say in the life sciences, Boston is among the best,” Immelt told the Boston Business Journal. “Our bet is we can be a part of that, work with universities and make it happen in this town.” Immelt said that GE, which already has 5,000 workers in Massachusetts, will make 4,000 new jobs available in the state.

Similarly Scott Tariff, CEO of midsize Eagle Pharmaceuticals, a Woodcliff Lake, New Jersey maker of injectable medicines, said the primary reason for locating his nine-year-old company in the Garden State (aside from living nearby) was the state’s broad array of pharma talent. The tax and regulatory climate, although improved, is not where he would like it to be. Revealingly, Eagle does not make any of its products in New Jersey.

But a state’s talent pool can only take it so far. Few states are blessed with as benevolent a climate and a first-rate university system as California, yet it is consistently ranked last each year by CEOs. In 2014, it topped New York for the largest out-migration of people. Much of the reason lies with the perception that Sacramento has a hostile attitude toward business.

Joseph Vranich, president of Spectrum Locations Solutions, a site-selection consultancy based in Irvine, California, has tracked what he calls “California divestment events”—business decisions to avoid the state. These come in three types: companies that left the state entirely, companies that opted to expand in states other than California and companies that planned to grow in the Golden State but changed their minds. Vranich has identified 1,510 divestment events occurring in California between 2008 and 2014. He thinks this understates the complete total because for every incident that becomes public knowledge five go unreported. He estimates that the real total is probably closer to 9,000 divestment events for this period. Even this number may be low since the cost and compliance burdens of California’s taxes and regulations fall disproportionately on smaller companies that are less able to afford the teams of attorneys and accountants that mega-corporations can employ. Google, Apple, Intel and Cisco will likely continue to grace the Silicon Valley corridor, but notice that their server farms and fab plants are located elsewhere.

RIGHT-TO-WORK RUNUP
Another predictor of a state’s ability to compete successfully is whether it has passed a right-to-work law. Such laws secure the right of employees to decide for themselves whether to join or financially support a union. West Virginia is the 26th state to do so, making RTW a majority among all the states. Nearly all the states in the top 10 ranking are RTW states. All of the leading 10 worst states at the bottom of the ranking are not.

States that wish to improve the perception of their competitiveness in the minds of business leaders should also consider rolling back the expansion of red tape and regulation that particularly hampers small businesses and, in turn, depresses job creation. Having limited working capital and fewer resources, smaller companies struggle with forms, permitting requirements and red tape. This is a major reason that small-company creation in the U.S. is running at its lowest level since the 1970s.

Even the center-left Economist noted that such concerns should not be “dismissed as the mad rambling of anti-government Tea Partiers. The burden placed on small firms by laws like Obamacare has been material. The rules shackling banks have led them to cut back on serving less profitable small customers. The pernicious spread of occupational licensing has stifled startups. Some 29 percent of professions, including hairstylists and most medial workers, require permits, up from 5 percent in the 1950s.”


Three Regions, Three Strategies, by Warren Strugatch

GREATER SEATTLE, WASHINGTON
GDP GROWTH 3.4% 2013-2014
RANK 58 / 361
Home base for Microsoft, Amazon and Boeing, greater Seattle has enjoyed a balmy economy for decades. To defend marquee employers against corporate poaching, regional business, government and academic leaders united to devised a growth strategy over 10 years ago to leverage its major employers’ economic mojo, tap the brainpower at University of Washington and Washington State to catalyze R&D initiatives and train a technically savvy work force.

Evidence suggests the plan’s working. The region added 54,300 jobs last year. To keep pulling in Millennials and other educated workers, leaders tout Seattle’s famous sense of place. Sites like the Pike Street Market, the iconic coffeehouses and the maritime heritage continue to attract newcomers—and growth depends on workforce expansion.

LAS VEGAS, NEVADA
GDP GROWTH 2% 2013-2014
RANK 137 / 361

Hammered by the Great Recession, Las Vegas has continued to shrivel as entertainment spending evaporated. To rebuild the economic base, city leaders and their statehouse counterparts jumpstarted growth through incentive recruitment. First, cross-state rival Reno wooed Tesla with a jaw-dropping billion-dollar incentive deal. Las Vegas countered by signing Tesla’s arch-rival Faraday Future to build a billion-dollar plant in North Las Vegas. Cost to the city: $216 million in incentives.

This past winter, members of the Site Selectors Guild honored Nevada for Excellence in Economic Development. The guild cited three projects, facilities for Barclaycard, eBay and Faraday Future. All involved Vegas.

MIDLAND, TEXAS
GDP GROWTH 24.1% 2013-2014
RANKING 1 / 361

For more than a decade, the towns dotting the Permian Basin below west Texas and southeast New Mexico gushed black gold. Among them, Midland, the oil-rich, home-of-George-W-Bush community, led all U.S. metro regions in GDP growth six of the past 10 years. During the boom, officials shrugged off the need to diversify. Why mess with your goose when it’s laying golden eggs?

Now that the bottom’s fallen out of the oil and gas sector—Midland lost some 14,500 jobs in 2015—the answer is clear. The Midland Development Corporation is talking up diversification and pursuing companies in the field of commercial space exploration. Most local businesses, though, are waiting out the cycle. Expect Midland to pump black gold again when prices reach 50
cents a barrel, says local oilman Kirk Edwards.

For the methodology behind the Best & Worst States rankings, click here.

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