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 46 measures into eight categories: economic conditions, business costs, state infrastructure, the availability and skill level of the workforce, quality of life, regulations, technology and innovation, and cost of living. Each category aimed to capture essential elements that businesses consider when deciding where to locate and operate.

Each category consists of several measures. We created an index for each category using a geometric mean. We then used the geometric mean of each index score to calculate the overall 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 contains business expenses that can vary between states. A state’s ranking in the Tax Foundation’s 2018 Tax Climate Index was included to capture the impact of state-level taxes on business. We also looked at 2017 commercial prices of electricity from the Energy Information Administration. From the Bureau of Economic Analysis, we included average compensation per job in 2017 as well as other forms of compensation, like retirement and insurance benefits as a percent of salaries and wages per job.

The cost of living index considers costs to both households and businesses. We included a housing affordability ratio, calculated using median annual homeownership costs as a percentage of median household income. Both measures are from the U.S. Census Bureau’s 2017 American Community Survey. Also included were regional price parity, a measure of the cost of living for 2016 from the BEA, and the average state and local tax burden as a percentage 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 — 2017 and 2012 through 2017 — in real GDP from the BEA, as well as changes in annual and average five-year unemployment rates from the Bureau of Labor Statistics. We also included data on the number of population-adjusted building permits issued in 2015 from the Department of Housing and Urban Development.

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 2017 ACS. We added the value of goods shipped from each state in 2018 as well as the growth of non-government establishments between 2015 and 2016 from the County Business Patterns. Both datasets are produced by the Census. The total number of small business loans one-million dollars or less comes from the Small Business Administration and is for the year 2015, the most recent data available. 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 we looked at the percentage of bridges deemed structurally deficient or functionally obsolete as of the end of 2017. 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.
We also included the estimated costs to commercial trucking due to traffic congestion in 2017 from the American Transportation Research Institute. Lastly, we used workers’ average commute time in each state from the 2017 ACS.

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 2017 ACS. We also looked at per-pupil education expenditures in each state for 2015 from Education Week. Finally, we incorporated our own population projections from 2020 through 2030, 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 2017 violent crime rate from the FBI, and the percentage of people without health insurance in 2017 from the ACS. We also used the United Health Foundation’s 2018 State Health ranking for All Health Outcomes. 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 2016 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 2018 from UnionStats. Additionally, the index includes parts of the Mercatus Center’s 2016 Regulatory Freedom Index 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 2018. From the U.S. Patent and Trade Office, we included the number of patents issued to state residents in 2015. We used the Milken Institute’s 2016 State Technology and Science Index and the number of science, technology, engineering, and mathematics (STEM) jobs as a share of all jobs calculated from BLS occupation data.

Additionally, we considered the 2016 results of the U.S. Census Bureau’s American Survey of Entrepreneurs. The ASE is an annual survey of business owners, who report on the ease of doing business in their state based on measures such as tax policy, business conditions, access to qualified labor, and other regional factors.