Would you rather spend your days in Minnesota or Hawaii? The answer may seem simple until you learn that Minnesota is the best state for business and Hawaii is the worst.
CNBC has released its annual ranking of how the 50 states stack up on creating an attractive place for businesses to set up shop. The rankings are based on more than 60 factors across ten broad categories including business friendliness, the workforce, costs of doing business, the state’s economy, quality of life, and access to capital.
Minnesota takes the top spot followed by Texas, Utah, Colorado, and Georgia. At the other end of the spectrum are the bottom five states: Nevada, Louisiana, Alaska, Rhode Island, West Virginia, and Hawaii.
Minnesota is a high-tax, high-wage, union-friendly state, but according the CNBC businesses are flocking there because it has the largest supply of skilled, qualified workers and other quality of life factors. Before the Democratic Governor pats himself on the back too hard, we should add the caveat that the study weighs workforce heavily which bodes well for this state. A strong workforce is important and perhaps explains why unemployment is lower in the birthplace of Spam and Scotch Tape.
Here’s more:
But Minnesota doesn't just stumble into the top spot by accident. The state's path to the top is marked by a carefully crafted and still controversial strategy by Gov. Mark Dayton, the first Democrat to hold the office in two decades. The hallmark of his plan is something most governors seeking to win the hearts of business would never dream of: a big tax increase.
Dayton began calling for higher taxes almost as soon as he took office at the start of 2011… By 2013 he managed to push through a whopping $2.1 billion tax increase, primarily targeting smokers and wealthy people (one of whom is Dayton himself, an heir to the Target retail fortune)…
This year, with a state budget surplus of nearly $2 billion, one of the lowest unemployment rates in the nation and apparently no exodus of millionaires, Dayton has been taking a victory lap of sorts. In his State of the State address in April, he said the improvement in state finances had laid the groundwork for solid economic growth.
Before state executives start following Minnesota and calling for tax increases or opening the door to business-unfriendly policies, it’s good to note that Texas comes in second place for all of the reasons you would expect. A perennial at the top of its class, Texas maintains low corporate taxes, friendly regulations to business, and maintains an “antipathy” towards unions. It only come up short by 4 points. Other top states share these similarities more or less.
And again, this is a private ranking that weighs workforce more heavily than other factors to its benefit or detriment. However, a strong workforce can be attractive to companies looking for long-term growth.
At the other end of the spectrum is the beautiful but business-strangling state of Hawaii. With the second-highest income tax rate in the nation, highest cost of living, and the most expensive state for doing business, CNBC explains that Hawaii will probably never get out of the bottom:
Face it: Hawaii will likely never make it into the upper echelons of the states. It just has so much working against it—not least of which is the fact that we award points in our Infrastructure category for railroads, and Hawaii doesn't have any.
But in addition to its many built-in disadvantages, Hawaii also loses points in areas it can control. In Infrastructure, the state has the worst roads in the nation, and its bridges are among the most decrepit, with more than 40 percent rated deficient or worse by the Department of Transportation.
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And in our all-important Workforce category, Hawaii ranks 46th. It is a heavily unionized state whose worker training programs have shown disappointing results.
Hawaiians are probably not too worried, as they still rank No. 1 for Quality of Life.
The moral of the story is that many factors come into play when a company decides to (re)locate to state not the least of which is the environment for business such as corporate taxes, personal income taxes, regulations, and union power.
A survey of CEOs ranking the best and worst states for business last year confirms that these factors play a strong role in where companies decide to set up shop, but so does the quality of the state’s or region’s workforce. The report concludes that according to decision-makers, states which lighten “the burden of government have generally improved economic growth over those insisting that state-directed spending and governance is best… 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.”