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Biggest Losers: These States Move South—in the Rankings

Chicago, Illinois
Steve Greer | E+ | Getty Images
Chicago, Illinois

As a business destination, Illinois has long been a study in contrasts.

It is the home of some of the world's most recognized companies—think McDonald's, Boeing and Sears Holdings among others—as well as important financial markets and two of world's most prestigious business schools. Businesses cannot afford to ignore the Land of Lincoln.

But Illinois is also home to crushing taxes, crippling regulation and a perennial fiscal mess.

This year, Illinois' negatives surpass its positives. The state falls eleven spots, to 37th from 26th, the biggest drop in our America's Top States for Business rankings for 2013.

To some degree, Illinois is suffering the side effects of its own medicine.

Hoping to ease the state's massive pension and debt obligations, Gov. Pat Quinn signed a 67 percent income tax increase into law soon after taking office in 2011. Business taxes rose as well. Add some of the highest gas taxes in the nation and sky-high utility rates, and Illinois falls to 44th place from last year's 26th in our Cost of Doing Business category.

(Read More: Slideshow: Top States for Quality of Life)

And some experts are warning things could get even worse before they get better—if they ever do.

While tax receipts have risen in the short term, Illinois still faces nearly $100 billion in unfunded pension liabilities. And the tax increases—which were supposed to help deal with the problems—are due to expire next year.

In June, Moody's Investors Service downgraded Illinois debt. Moody's said the new rating, "while very low for a U.S. state, is consistent with the General Assembly's inability to steer the state from a path to fiscal distress."

Or from a path downward in our rankings, and on that path, Illinois is not alone.

(Read More: The Most Improved States for Business 2013)

Pennsylvania and Maryland each fall nine spots in our study—Pennsylvania to 39th and Maryland to 40th.

Pennsylvania's decline comes from a slip in Business Friendliness. The Keystone State's courts have a well-earned reputation as plaintiff friendly. The U.S. Chamber of Commerce has criticized what it calls a "surge of out of state plaintiffs" in the state's Court of Common Pleas, suggesting they are shopping for the court system where they have the best chance of winning.

Maryland owes much of its drop to tepid growth and a slow housing recovery, the Old Line State slips to 33rd from 24th in our Economy category. In the period we measured, 2011 to 2012, Maryland's economy barely budged. State GDP growth has since rebounded and is now above the national average, giving Maryland some hope for next year. The state also falls to 45th place from 24th in Business Friendliness.

New Hampshire also heads lower, dropping eight places to finish 27th overall.

The Granite State's economy has barely budged compared to its New England neighbors. That hurts the state's finances, and pushes the state down to 43rd from 34th in our important Economy category.

"Slow revenue growth made the task of balancing the budget more difficult," Gov. Maggie Hassan said in her February budget address.

And what little recovery there is has managed to hurt New Hampshire in a category where it usually excels: Quality of Life. The state drops to 9th place from last year's 1st place tie with Hawaii, largely due to declining air quality from congested highways and neighborhoods near the Massachusetts border.

(Read More: Live Free and Do Business in New Hampshire)

North Carolina falls eight places as well, as its increasing Cost of Doing Business cancels out solid gains in its Economy. The Tar Heel State—which finished in our Top Five at 4th place last year—drops to 12th overall.

State finances in California are much improved from a year ago, but not without some pain in the form of higher taxes. Now the most expensive state in the nation to do business in, the Golden State slips seven spots to 47th place, joining the ranks of America's Bottom States for Business.

—By CNBC's Scott Cohn. Follow him on Twitter @ScottCohnCNBC.

CORRECTION: This version corrected the amount Illinois has in unfunded pension obligations.

  • Scott Cohn develops in-depth features, special reports and documentaries for CNBC and CNBC.com.

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