The Best (and Worst) States for Business

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Methodology

To determine the best and worst states for business, 24/7 Wall St. compiled 47 measures into eight categories: business costs, cost of living, economy, infrastructure, labor and human capital, quality of life, regulation, and technology and innovation. Each category aimed to capture the essential elements that businesses consider when deciding where to locate.

Each category consists of several measures. Because many of the measures were interrelated, we created an index for each category using a geometric mean rather than the traditional arithmetic mean. We then used the geometric mean of each index score to calculate a state’s overall score. Potential scores ranged from one to 50, with lower values indicating better scores. Two categories — labor and human capital and technology and innovation — received double weight, and quality of life and cost of living were given half weights. Cost of business, infrastructure, economy, and regulation received full weight.

The business costs index offers a diverse look at the immediate expenses of a business. One of the category’s measures is the Tax Foundation’s 2016 Tax Climate Index, which captures the impact of state-level taxes on business. We also looked at 2014 commercial prices of electricity from the Energy Information Administration (EIA) and the 2013 costs of purchasing and renting industrial, office, and retail space per square foot from CoStar Group Inc. From the Bureau of Economic Analysis (BEA), we included average compensation per job in 2014 computed as a percentage of average wages and salaries, as well as average wages and salaries in each state.

The cost of living index was designed to encapsulate costs to both households and businesses. We included a housing affordability ratio, calculated using median annual ownership costs as a percentage of median household income. Both measures are from the U.S. Census Bureau’s 2014 American Community Survey (ACS). Also included was regional price parity, a measure of the cost of living, for 2013 from the BEA, and the average state and local tax burden as a percent of per capita income from the Tax Foundation. Tax Foundation figures are for the 2012 fiscal year.

Economy is the broadest category and was designed to measure each state’s productivity, growth potential and labor market. We included both one- and five-year growth rates in real GDP from the BEA, as well as annual and average five-year unemployment rates from the Bureau of Labor Statistics (BLS). We also included data on the number of population-adjusted building permits issued in 2014 from the Department of Housing and Urban Development, and the percentage of 2014 employment that was hired to fill new positions rather than replace older workers. These data were from the Quarterly Workforce Indicators, a subsidiary of the Census.

Because many businesses benefit from higher consumer spending, the economy index includes state poverty rates and the individual earnings gap between men and women, both from the 2014 ACS. We added the value of goods shipped from each state in 2012 from the Commodity Flow Survey, as well as the growth of non-government establishments between 2012 and 2013 from the County Business Patterns (CBP). Both datasets are produced by the Census. Small business lending per employee in 2013 came from the Small Business Administration, and 2010 population density per square land mile from the Census. Finally, we created a composite rank of each state’s credit ratings from Standard & Poor’s and Moody’s Investor Service.

The infrastructure index captures the importance of transportation to businesses and employees. From the Federal Highway Administration (FHWA) we looked at the percentage of bridges deemed structurally deficient or functionally obsolete as of the end of 2014. Also from the FHWA, we used the percentage of rural and urban interstate miles in poor condition. Poor was defined as interstate roads with an International Roughness Index score greater than 170, or 220 for widely used rural principal arterial roads. We also considered FHWA data on state investments per road mile in 2013. From the Federal Aviation Administration, we looked at the number of public use airports in each state, as well as estimated costs to commercial trucking due to traffic congestion in 2013 from the American Transportation Research Institute. Lastly, we used workers’ average commute time in each state from the 2014 ACS.

While the economy index provides an overview of general labor market health, the labor and human capital index offers a look at the quality of a state’s labor force. We included data on high school, bachelor’s, and graduate educational attainment rates from the 2014 ACS. We also looked at per-pupil education expenditures in each state for 2013 from Education Week. Finally, we incorporated our own population projections from 2010 through 2020, using both the growth in total population as well as the projected growth in the working-age population. Population projections were calculated using the cohort component method and used population data from the ACS and birth and survival rates from the Centers for Disease Control and Prevention.

The quality of life index was constructed to offer insight into why employees may decide to reside in particular areas. We included each state’s 2014 violent crime rate from the Federal Bureau of Investigation, and the percentage of people without health insurance in 2014 from the ACS. We also used the United Health Foundation’s 2015 State Health ranking. From the Department of Education, we incorporated the total number of post-secondary schools in each state. We also looked at the number of art, entertainment, and recreation establishments per 100,000 state residents in 2013 from the CBP.

The regulation index includes each state’s status as a right-to-work state, as well as the share of non-agricultural workers who were union members as of 2014 from UnionStats. Additionally, the index includes the 2013 Regulatory Freedom Index from the Mercatus Center, and the Institute for Legal Reform’s 2015 Lawsuit Climate Index, an indication of how fair and reasonable a state’s legal system is perceived to be by businesses.

The technology and innovation index includes data on the average venture capital investment in businesses in each state, as well as the frequency of venture capital deals. Both metrics are from the National Venture Capital Association and are for 2014. From the U.S. Patent and Trade Office, we included the number of patents issued to state residents in 2014. We used the Milken Institute’s 2014 State Technology and Science Index and the number of science, technology, engineering, and mathematics (STEM) jobs as a share of all jobs from the Brookings Institution’s 2013 Hidden STEM Economy report.

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