States Try to Lure Businesses—and It's Tough Competition

The bigger they are, the harder they fall.

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Siri Stafford | Digital Vision | Getty Images
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And in each of America’s Top States for Business, they’re well aware of that. Getting to the top is one thing. Staying on top is another, in the most brutal competitive landscape in a generation.

We didn’t make it any easier when we decided for the first time to consider the states’ fiscal conditions in this year’s Top States study. But it is a factor we couldn’t ignore any longer. That’s because being competitive doesn’t come cheap, and state coffers are in their worst shape in decades.

When states make their pitches to companies, those pitches invariably include selling points that will somehow be paid for by taxpayers. Business incentives, quality education, strong infrastructure—none of that is free. And yet the states are facing the biggest drop in tax receipts on record according to the Center on Budget and Policy Priorities.

The non-partisan think tank says 44 states (and the District of Columbia) faced budget shortfalls for the 2012 fiscal year that begins next month. Because every state except Vermont has a law requiring a balanced budget, the states are closing those gaps. But they are not doing so without pain—and without impacting other areas of competitiveness.

Take higher education, which many states tout as an ally for business—providing companies with critical research as well as skilled graduates joining the workforce. The Center says 43 states have cut back on higher education since the downturn began.

Thirty four states have reduced spending on K-12 programs. We look at all levels of education in our Education category, worth 225 out of 2,500 points, and school spending is a part of the equation. But that is just part of the potential impact.

“When states cut spending, they lay off employees, cancel contracts with vendors, reduce payments to businesses and nonprofits that provide services, and cut benefit payments to individuals,” wrote the Center’s Michael Leachman, Erica Williams and Nicholas Johnson in a report in March. “All of these steps remove demand from the economy.”

An apples-to-apples comparison of state budget gaps is not easy. State budgets vary widely in size. Plus, some states pass a budget every year, while others adopt biennial budgets. We followed the CBPP’s lead and looked the states’ projected fiscal 2012 shortfalls as a percentage of last year’s general fund budget.

That’s going to leave a mark on some states—including some traditional powerhouses. Last year’s Top Five states went into this year with a combined $20.3 billion budget shortfall.

By the same token, budgets provide a potential boon to the states with surpluses, none of which have traditionally done well in past studies. Those states: Alaska, Arkansas, Montana, North Dakota, West Virginia and Wyoming.

Will this new measure—which offers no more than 50 out of 2,500 possible points—be enough to shake up this year’s rankings? Watch this space as we count down America’s Top States for Business beginning June 27.