SMALL BUSINESS POLICY INDEX 2019 - SBE Council

[Pages:85]SMALL BUSINESS POLICY INDEX 2019:

RANKING THE STATES ON POLICY MEASURES AND COSTS IMPACTING SMALL BUSINESS AND ENTREPRENEURSHIP

23rd Annual Edition

NEW in this Edition: Integrated SMALL BUSINESS TAX INDEX 2019

by Raymond J. Keating Chief Economist

Small Business & Entrepreneurship Council

May 2019

Table of Contents

Introduction: State Policies Matter in Terms of Growth Tallying Up the Small Business Policy Index 2019 Tallying Up the Small Business Tax Index 2019 The Measures: What's Included and Why The Supporting Economics Appendix A: State Rankings of Top Personal Income Tax Rates Appendix B: State Rankings of Top Individual Capital Gains Tax Rates Appendix C: State Rankings of Top Individual Dividend and Interest Tax Rates Appendix D: State Rankings of Top Corporate Income Tax Rates Appendix E: State Rankings of Top Corporate Capital Gains Tax Rates Appendix F: Rankings of State and Local Property Taxes Appendix G: Rankings of State and Local Sales, Gross Receipts and Excise Taxes Appendix H: State Rankings of Adjusted Unemployment Taxes Appendix I: Rankings of State Gas Taxes Appendix J: Rankings of State Diesel Taxes Appendix K: State Rankings of Wireless Taxes Appendix L: State Rankings of Energy Regulations Index Appendix M: State Rankings of Workers' Compensation Costs Appendix N: Rankings of the Number of State and Local Government Employees Appendix O: Rankings of State and Local Government Five-Year Spending Trends Appendix P: Rankings of Per Capita State and Local Government Expenditures Appendix Q: Rankings of Per Capita State and Local Government Debt Appendix R: Rankings of Federal Revenue as a Share of Total State and Local Revenue Appendix S: Rankings of State Unfunded Pensions Appendix T: State Rankings of Crime Rate Appendix U: Small Business Policy Index Scores by States Listed Alphabetically About the Author

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Introduction: State Policies Matter in Terms of Economic Growth and Opportunity

The "Small Business Policy Index: Ranking the States on Policy Measures and Costs Impacting Small Business and Entrepreneurship" examines the 50 states according to various major government-imposed or government-related costs that directly or indirectly affect entrepreneurship and business, as well as the investment that is so critical to start-ups and businesses looking to grow. To sum up, the Index ranks the states according to their public policy climates for the risk taking that drives economic growth and job creation.

Of the 62 measures included in the 2019 edition of the Index, 27 are taxes or tax related, 26 relate to rules and regulations, 6 deal with government spending and debt issues, with the 3 remaining measures gauging the effectiveness of important government undertakings.

Most small business owners have firsthand knowledge of the costs and burdens imposed by government. Taxes and regulations, for example, drain enterprises of vital resources, distort decision-making and incentives, and redirect resources and energies away from improving and/or expanding a business.

Unfortunately, too many elected officials, policy advisers, and special interests choose to ignore the economic realities of how government affects entrepreneurship, business and investment. It is important to keep in mind that the "Small Business Policy Index" is rooted in the basic tenets of sound economics, that is, the realities of how governmental policies impact incentives, costs and private-sector decision-making. Critics of reports like the "Small Business Policy Index" and similar studies tend to discard economic reality in favor of political preferences. When political incentives trump economics, the impact of higher taxes, increased regulation, and much higher levels of government spending and debt simply are ignored.

In this report, we explain why each measure is included, and we cite a wide array of studies that reinforce the fundamental economic thinking and principles that underlie this effort. In the end, the greater the governmental burdens ? via taxes, regulations, spending, debt, and failures to adequately execute the essential duties of government ? the greater the negatives for economic risk taking, for growth in the economy, and for the state's competitiveness and attractiveness. Again, that is not just the case at the federal level, but in the states as well ? as made clear by the "Small Business Policy Index".

Consider the striking relationships between Index results and key measures of economic performance:

State Economic Growth. Real average annual economic growth from 2010 to 2017 among the top 25 states ranked on the 2019 "Small Business Policy Index" averaged 1.76 percent, which was 38 percent faster than the 1.28 percent average rate for the bottom 25 states. So, on average, economic growth performed markedly better during this poor recovery among the top 25 states on the Index compared to the bottom 25 states.

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Population Growth. The top 25 states ranked on the 2019 "Small Business Policy Index" averaged state population growth of 6.94 percent from 2010 to 2018 versus only 3.35 percent for the bottom 25 states. That is, the average growth rate was 107 percent higher among the top 25 states versus the bottom 25 states. In terms of total population numbers, the top 25 states saw an increase in population of 13 million from 2010 to 2018 versus a gain of 4.8 million in the bottom 25 states.

Population Movements ? Net Domestic Migration. Perhaps most telling is net domestic or internal migration, or the movement of people between the states, that is, excluding births, deaths and international migration. It clearly captures people voting with their feet. From 2010 to 2018, the top 25 states on the "Small Business Policy Index" netted a 3.73 million increase in population at the expense of the bottom 25 states, which lost 3.76 million (with the District of Columbia's gain explaining the difference). For good measure, among the bottom 25 states, 18 lost population to other states, and the bottom 7 states all suffered negative domestic migration.

So, there is a notable difference between the states ranked in the top half versus the bottom half of the "Small Business Policy Index" when it comes to economic growth, population growth, and movement of people among the states. It should not be surprising that, on average, states that impose lower overall governmental burdens on entrepreneurship, business and investment outperform states that impose heavier burdens. When it comes to the economy, state policies matter.

While the Index is not strictly comparable from year to year (due to changes in factors and/or how those measures are calculated), major policy changes from the publication of last year's Index should be noted.

First, however, changes at the federal level should be noted. With a major tax measure passed at the end of 2017, the climate for entrepreneurship and small business across the nation was improved. Among the key measures were:

? The corporate income tax rate was reduced from 35 percent and 21 percent.

? Individual income tax rates were reduced as well, but by smaller amounts, with the top rate, for example, declining from 39.6 percent to 37 percent. These rate reductions expire after 2025.

? For non-C-Corps, a 20-percent deduction was adopted on pass-through income, bringing the effective top federal income tax rate on such passthroughs (that is, S-Corps, LLCs, partnership and sole proprietorships) down from 39.6 percent to 29.6 percent. (For certain service businesses, this deduction is phased out if their business income exceeds $315,000 for married joint filers and $157,500 for individual filers.) Unfortunately, this measure (along with reductions in individual tax rates) is temporary, expiring after 2025.

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? Expensing of capital investment was expanded. For all businesses, expensing of certain investments, such as machinery and equipment, is allowed for five years and then phased down over the following five years. In addition, small business Section 179 expensing was expanded, raising the cap from $500,000 to $1 million, and increasing the level where this is phased out from $2 million to $2.5 million. ? The corporate alternative minimum tax was eliminated, while the exemption level for the individual AMT was increased. ? The exemption on the death tax was increased, doubling the $5.6 million exemption level in effect when the legislation was passed. ? And the Affordable Care Act (ACA) individual mandate penalty, or tax, is repealed in 2019. The mandate that individual either purchase health insurance or pay a penalty was a punitive tax. Now, let's consider the following changes in the states: States Making Positive Changes ? Georgia reduced its personal income, individual capital gains, corporate income and corporate capital gains tax rates from 6 percent to 5.75 percent. ? Idaho reduced its top individual income and capital gains tax rate from 7.4 percent to 6.925 percent, with the corporate income and capital gains tax rates matching that change. ? Indiana reduced its top corporate income and capital gains tax rate form 6 percent to 5.75 percent. ? Kentucky reduced its personal income, individual capital gains, corporate income and corporate capital gains tax rates from 6 percent to 5 percent. ? Missouri reduced its personal income and individual capital gains tax rate from 6 percent to 5.8 percent. ? New Hampshire reduced its business income and capital gains tax rate from 8.2 percent to 7.7 percent. ? North Carolina reduced its personal income and individual capital gains rate from 5.499 percent to 5.25 percent. In addition, the corporate income and capital gains tax rate was dropped from 3 percent to 2.5 percent. ? Tennessee reduced its tax rate on dividends and interest from 3 percent to 2 percent.

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? Utah reduced its personal income, individual capital gains, corporate income and corporate capital gains tax rates from 5 percent to 4.95 percent.

? Vermont reduced its personal income tax from 8.95 percent to 8.75 percent, and its individual capital gains tax rate from 5.37 percent to 5.25 percent.

States Making Negative Changes

? New Jersey increased income tax rates across the board. The individual income and capital gains tax rate increased from 8.97 percent to 10.75 percent. And the top corporate income and capital gains tax rates jumped from 9.0 percent to 11.5 percent, which is now the highest state corporate tax rate among the 50 states.

? Kansas increased its top personal income and individual capital gains tax rate from 5.2 percent to 5.7 percent.

? New York increased its top corporate income and capital gains tax rate from 8.359 percent to 8.379 percent.

? 22 states saw their property tax burdens increase: Alabama, Arizona, Arkansas, Hawaii, Indiana, Iowa, Kentucky, Louisiana, Maine, Minnesota, Mississippi, Nebraska, New Hampshire, New Mexico, North Dakota, Oklahoma, Rhode Island, South Dakota, Texas, Vermont, West Virginia, and Wyoming.

? 19 states increased their minimum wage mandate: Alaska, Arizona, Arkansas, Colorado, Delaware, Florida, Maine, Maryland, Massachusetts, Minnesota, Missouri, New Jersey, New York, Ohio, Oregon, Rhode Island, South Dakota, Vermont and Washington.

Tallying Up the Small Business Policy Index 2019

Taxes and regulations matter a great deal to entrepreneurs, small businesses and the economy in general. The "Small Business Policy Index" makes clear that government-imposed or government-related costs have a real impact on the entrepreneurial sector of our economy. As for how the final "Small Business Policy Index" score is tallied, the 62 measures included are simply added together into one index number. Obviously, other costs are imposed on entrepreneurs and businesses at the state and local levels, but it often is difficult or impossible to gain a comparable measure of such costs across all of the states. Still, the "Small Business Policy Index" manages to capture much of the governmental burdens affecting critical economic decisions - particularly affecting investment and entrepreneurship - state by state.

Under the "Small Business Policy Index," the lower the index number, the lighter the governmental burdens, and the better the environment for entrepreneurship. The "Small Business Policy Index" provides a measure by which states can be compared according to how the state and local

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governments treat small business and entrepreneurs. In essence, it is a comparative measure of economic incentives relating to government policies: the lower the "Small Business Policy Index" number, the greater the incentives to invest and take risks in that particular state. (Note: the 2019 "Small Business Policy Index" cannot be directly compared to editions from previous years as the Index has been revised and expanded each year.)

Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

Small Business Policy Index 2019: State Rankings

State

SBPI

Rank State

Texas

45.798

26 Idaho

Nevada

49.100

27 New Hampshire

Florida

49.920

28 Wisconsin

South Dakota

51.618

29 Louisiana

Wyoming

56.093

30 Kentucky

Indiana

68.129

31 West Virginia

Utah

71.002

32 Montana

Alabama

71.378

33 Delaware

Arizona

71.449

34 Pennsylvania

Washington

71.527

35 Illinois

Tennessee

72.570

36 Arkansas

Colorado

73.496

37 Nebraska

Ohio

73.543

38 Massachusetts

Michigan

73.728

39 Rhode Island

North Carolina

74.517

40 Maryland

Virginia

75.880

41 Maine

Mississippi

78.522

42 Iowa

North Dakota

79.159

43 Oregon

Missouri

79.938

44 Connecticut

South Carolina

79.998

45 Vermont

Oklahoma

80.653

46 Minnesota

Georgia

80.689

47 New York

Alaska

82.870

48 Hawaii

New Mexico

84.238

49 California

Kansas

85.673

50 New Jersey

SBPI 85.720 87.436 87.675 89.047 89.051 89.325 90.785 91.472 94.309 96.716 98.069 102.046 105.044 106.290 107.927 109.022 112.303 112.829 113.830 119.403 122.883 124.075 129.044 143.165 146.270

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Starting up, running and/or investing in businesses are risky ventures. But as noted earlier, those ventures spur the economy forward. Putting aside the political rhetoric, just how friendly or unfriendly are the policies that elected officials actually implement toward entrepreneurship and small business?

In terms of their policy environments, the most entrepreneur-friendly states under the "Small Business Policy Index 2019" are: 1) Texas, 2) Nevada, 3) Florida, 4) South Dakota, 5) Wyoming, 6) Indiana, 7) Utah, 8) Alabama, 9) Arizona, 10) Washington, 11) Tennessee, 12) Colorado, 13) Ohio, 14) Michigan, 15) North Carolina.

In contrast, the most unfriendly policy environments for small businesses are: 41) Maine, 42) Iowa, 43) Oregon, 44) Connecticut, 45) Vermont, 46) Minnesota, 47) New York, 48) Hawaii, 49) California, 50) New Jersey.

Some elected officials, policymakers and special interests believe that taxes, regulations and other governmental costs can be increased with impunity. That is a political fantasy. Economic reality tells us something very different. Ever-mounting burdens placed on entrepreneurs and small businesses by government negatively affect economic opportunity. People go where economic opportunity is, in turn, bringing more opportunity with them. The "Small Business Policy Index" tries to make clear the relative governmental burdens placed on entrepreneurship among the states, so that business owners and their employees, elected officials and citizens in general can better grasp the competitive position of their respective states.

Tallying Up the Small Business Tax Index 2019

SBE Council's "Small Business Tax Index 2019" is a subset of the larger "Small Business Policy Index," The Small Business Tax Index ranks the states from best to worst in terms of the costs of their tax systems on entrepreneurship and small business. This year's edition of the Index pulls together 26 different tax measures, and combines those into one tax score that allows the 50 states to be compared and ranked.

The 26 measures are: 1) state's top personal income tax rate, 2) state's top individual capital gains tax rate, 3) state's top tax rate on dividends and interest, 4) state's top corporate income tax rate, 5) state's top corporate capital gains tax rate, 6) any added income tax on S-Corporations, 7) any added income tax on LLCs, 8) Section 179 expensing conformity, 9) average local personal income tax rate, 10) whether or not the state imposes an alternative minimum tax on individuals, 11) whether or not the state imposes an alternative minimum tax on corporations, 12) whether or not the state's personal income tax brackets are indexed for inflation, 13) whether or not the state's corporate income tax brackets are indexed for inflation, 14) the progressivity of the state's personal income tax brackets, 15), the progressivity of the state's corporate income tax brackets, 16) property taxes, 17) consumptionbased taxes (i.e., sales, gross receipts and excise taxes), 18) whether or not the state imposes a death tax, 19) unemployment taxes, 20) whether or not the state has a tax limitation mechanism, 21) whether or not the state imposes an Internet access tax, 22) remote seller taxes, 23) gas tax, 24) diesel tax, 25) wireless taxes, and 26) LLC fees.

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