What states are the most friendly for small business owners?
While taxes and federal regulations top a lot of other surveys about the biggest issues small business owners face, Thumbtack.com asked owners of some of the smallest businesses across the country what mattered most to them in operating their business.
Small businesses have been described as the engine driving America’s economy, and with good reason. According to the Small Business Administration, small businesses accounted for 65 percent of the net new jobs created between 1993 and 2009 and employ nearly half of all private sector employees.
Despite this, the share of GDP produced by small businesses has steadily declined over the past decade. There has never been a more important time to determine what matters most to small businesses.
The Thumbtack.com National Small Business Survey, conducted in partnership with the Kauffman Foundation, is a nonpartisan, national report card of how friendly states and cities are to entrepreneurs and job creators. This survey is unique from other indexes that attempt to rank the best and worst places to do business in the United States because it goes directly to the source: the small business owners themselves. By reaching out directly to the more than 275,000 small business owners and managers who list their services on Thumbtack.com and having them rate their state and city across a number of categories, we were able to capture nuances that are often difficult or impossible to measure through other data sources or are ignored altogether.
The survey data was collected over a period of two months, asking questions across 16 different categories like ease of starting a small business, cost of hiring a new employee, friendliness of health and safety regulations, friendliness of zoning regulations, publicity of training programs, current economic health of the small business and forecast of the small business’s future economic health. Instead of relying on proxies like overall tax rate or census data, this survey was able to both include the most relevant factors and exclude the irrelevant ones by asking small business owners themselves. Moreover, the findings also provide insights for policymakers at every level on what entrepreneurs value when starting their enterprises.
"While many might assume that a location’s tax structure would be a dominant factor in overall small business friendliness, our survey found that small businesses actually care nearly twice as much about the area’s licensing requirements."
Many study rankings distill all of the evaluated factors into one final number. While having the advantage of providing a simple and easily comparable result, we felt that this is an oversimplification and fails to provide the level of detail that is needed by small businesses and those studying them. Acknowledging that different factors are important to different businesses, we provide rankings and grades for each category. Although we do assign a ranking and grade for “Overall Business Friendliness,” it is based on its own questions, and not a combination of the other questions in the survey.
Small business owners ranked Idaho, Texas and Oklahoma as the most friendly states to small business, with Oklahoma City and Dallas-Ft. Worth taking top honors among cities across the nation. Vermont and Rhode Island found themselves on the opposite end of the spectrum, joined in the bottom-five by New York, California and Hawaii. Beyond the overall grades and rankings, there were other data points worth considering, particularly in the context of a national conversation about what we need to get small businesses growing again.
A focal point of the national debate over job creation is the overall tax rates in states and municipalities. And while many might assume that a location’s tax structure would be a dominant factor in overall small business friendliness, our survey found that small businesses actually care nearly twice as much about the area’s licensing requirements. Over half of respondents were subject to special regulations, like annual licensing fees for pet sitters or months-long permitting processes for electricians, and the ease of complying with these requirements was by far the most important factor in determining overall small business friendliness. Striking the right balance between making it easier for businesses to start their enterprise and protecting consumers should be an important priority for lawmakers.
Another one of the best predictors of small business friendliness is whether small business owners are aware of state or local governments offering training programs for small businesses. This is a point often lost in the national debate, but there is a role that state and local governments can play. They can help foster job creation in their communities by ensuring that local would-be entrepreneurs have the opportunity to receive certain training programs. Small business owners aren’t pining for less government as much as they are for smarter government.
Overall, our Small Business Survey paints a nuanced picture of the conditions that entrepreneurs value when considering whether to start a business. For example, the local tax code is more important than the cost of hiring a new employee to would-be small business owners in Texas, while the opposite is true in California.
So much of the debate in Washington surrounding job creation is focused on what Washington can do to create jobs and get the economy growing. If anything, federal policymakers should take note that the one-size-fits-all policy prescriptions coming from Washington may not hold the key to economic growth. It appears that job creation, like politics, is local.
Sander Daniels is a co-founder of Thumbtack.com, a website for consumers looking for services from local, pre-screened businesses.