by Scott Cohn
We have a winner—and a new champion!
South Dakota has climbed to the top of America’s Top States for Business for 2013.
It is the best finish yet for the Mount Rushmore State, which has always been a quiet contender in our annual study, rarely finishing outside the Top 10. But more impressive, South Dakota’s point total this year—1,639 out of a possible 2,500—is the highest logged by any state since we began keeping score in 2007.
Each year, we rate all 50 states on more than 50 metrics in 10 categories of competitiveness. We weight the categories based on how frequently they appear as selling points in state economic development marketing materials. That way, we hold the states to their own standards. You can read more about our methodology here.
This year’s categories and point values are:
• Cost of Doing Business (450 points)
• Economy (375 points)
• Infrastructure (350 points)
• Workforce (300 points)
• Quality of Life (300 points)
• Technology & Innovation (300 points)
• Business Friendliness (200 points)
• Education (150 points)
• Cost of Living (50 points)
• Access to Capital (25 points)
In many ways, the competitive landscape—and our study—shifted in South Dakota’s direction this year. A wave of tax cutting following the 2010 Republican sweep of statehouses across the country has led to a wave of states touting their low costs of doing business. This is more than just politics, and claims about low costs are hardly limited to Republican administrations. After all, the message falls on very receptive ears. Business leaders and groups we consult for our study consistently put cost at the top of their criteria.
As a result, Cost of Doing Business carries more weight than ever in our study.
And no state delivers the goods on low business costs the way South Dakota does.
South Dakota not only offers one of the lowest tax burdens in the country—no individual or corporate income taxes and low sales and property taxes—but it also has among the nation’s lowest utility rates, wages and commercial rent costs.
The state is not a one-trick pony, however.
In Business Friendliness, which measures the state’s legal and regulatory climate, South Dakota finishes No. 2 this year, to perennial favorite Delaware.
With a pristine environment, relatively low crime, and some of America’s most stunning natural beauty, South Dakota finishes seventh in Quality of Life.
And South Dakota’s economy, while often overshadowed by its oil-booming neighbor to the north, finishes a solid sixth. State finances are strong, the housing market is recovering, and the unemployment rate is among the nation’s lowest.
That low unemployment hurts South Dakota in the Workforce category, where it finishes 11th—in part due to the short supply of available workers. It is a problem Gov. Dennis Daugaard is not taking lying down.
“I like to think of South Dakota is not stealing employees, but providing refuge,” Daugaard said.
But he has other issues to deal with beyond a worker shortage.
South Dakota finishes near the bottom, 48th, in the Technology & Innovation. It is among the least Internet-connected states, and research dollars largely bypass the state. Venture capital funding also steers clear, with a 39th-place finish in Access to Capital. And the state lags in Education, where it finishes 30th.
Still, South Dakota overcomes all of that to come out on top overall.
Rounding out this year’s Top Five are some old favorites and a new entry.
Texas, which has never finished below second place in our study, keeps the streak alive in 2013. America’s Top State for Business last year (and in 2008 and 2010) slips to runner-up this year, but still logs a solid 1,593 points, with first-place rankings in our Economy and Infrastructure categories. Texas’ point total slips a bit from last year, though, and it has an economic upstart nipping closely at its heels.
North Dakota, a historic economic success story, improves on last year’s fifth place finish to come in third this year with 1,592 points. The Peace Garden State ranks second—just behind Texas—in Economy and in Infrastructure. But North Dakota is, in some ways, held back by its own prosperity. With the nation’s lowest unemployment rate, workers are in short supply. That raises wage costs. And North Dakota’s growing pains leave the state with some of the most expensive rental costs in the country for industrial space. North Dakota finishes 12th in Cost of Doing Business, and near the bottom—46th—for Technology & Innovation.
Nebraska cracks our Top Five for the first time, after just missing last year. The Cornhusker State finishes fourth with 1,575 points, up from sixth place last year. Nebraska shines in Business Friendliness, where it finishes third, as well as Economy and Quality of Life, where it comes in fourth. Tax reform has been a major priority in the state, which comes in 10th for Cost of Doing Business.
We have never had a tie in our Top Five, until now. Utah and Virginia, last year’s Nos. 2 and 3 states respectively, tie for fifth place this year. While they come in dead even at 1,542 points, each takes a different route to the Top Five.
Utah’s strongest category is Business Friendliness, where it finishes fourth. The Beehive State is attracting lots of investment, finishing seventh for Access to Capital.
Virginia brings the sixth-best Workforce to the table, and finishes eighth in Education.
The two states tie for 10th place in the Economy category.
Texas in particular makes a big deal about low costs, and with no individual or corporate income tax, the Lone Star State does offer one of the most favorable tax burdens in the country, despite higher-than-average sales and property taxes. But Cost of Doing Business measures more than just taxes. For example, Texas has some of the highest electricity costs in the country, and office and retail rent is on the high side as well.
Texas also suffers in our Quality of Life category, falling to 41st (tied with South Carolina) from 35th in the category last year. The state’s air and water quality rank poorly, and Texas leads the nation in residents without health insurance. However, Gov. Rick Perry has defended that statistic as emblematic of the state’s freedom of choice.
“Texas decided a long time ago that we weren’t going to burden people and force them to buy insurance,” Perry told CNBC in 2012.
That may be, but for a business considering locating or expanding in Texas, the large number of uninsured—and the impact on overall health care costs—becomes a factor.
For Virginia, which took the Top State title in 2007, 2009 and 2011, cost has never been its biggest selling point. But with Cost of Doing Business playing such an important role in our rankings, the fact that the commonwealth drops to 38th place in the category—down six spots from last year—definitely hurts.
What had been Virginia’s greatest built-in advantage—proximity to the nation’s capital—has come back to haunt the state in recent years. Virginia’s fortunes are so tied to those of the federal government that Moody’s slapped a negative outlook on the state’s otherwise sterling bond rating in 2011. That hurts the state in our Economy category, but Virginia still finishes a respectable 10th.
Virginia has also been tackling troubles with its infrastructure. In fact, Gov. Bob McDonnell used the state’s precipitous drop in our Infrastructure category last year—which he called “unacceptable”—to push through a landmark $6 billion transportation bill in February. While the bill probably came too late to affect our rankings, Virginia does improve to 21st in the category (tied with Utah), up from 33rd last year.
Biggest Pop and Biggest Drop
Massachusetts has had a rocky road in recent years. The Bay State made it into our elite Top Five in 2010, finishing fifth. Then it slipped to sixth in 2011, before plummeting to 28th last year because of drops in Economy, Infrastructure, and in Massachusetts’ usual strong suit, Technology & Innovation.
Massachusetts improves in most categories this year, most notably Economy, where the state jumps to third place from 21st. The state is experiencing solid economic growth, state finances are improving, and so is the housing market. Massachusetts does drop to seventh for Education, however, a category where it is typically at or near the top.
Delaware had fallen to 43rd in 2012 because of a rare stumble in our Business Friendliness category. Yes, Delaware is the corporate address for more than half the nation’s publicly traded companies, and accommodative business regulations are the key reason. But the First State has been embroiled in controversy over its unclaimed property laws, which some have called a “stealth tax” on business. The state has raked in millions year after year by assessing businesses penalties and fees for property they hold but no longer own.
Last year, the state introduced some business-friendly reforms to the program, including allowing some businesses to self-report their holdings. While critics say the changes do not go far enough, Delaware is back on top for Business Friendliness this year, and up overall—though still in the bottom tier of states.
Illinois posts the biggest decline in our rankings this year, falling 11 spots to 37th, from 26th in 2012. With a heavy tax burden including among the highest gasoline taxes in the country, as well as high utility costs and relatively high wages, Illinois ties for 44th place (with Pennsylvania and Washington) for Cost of Doing Business. With the worst bond rating in the country, high unemployment and a lackluster housing market, Illinois finishes 45th in the crucial Economy category. But the Land of Lincoln does manage top five finishes in Infrastructure and Technology & Innovation.
Bringing up the Rear
We score all 50 states, so if there are Top States, there must be Bottom States as well. And just like at the top, we have a shakeup at the bottom this year as well.
No longer in the Bottom Five is perennial loser Alaska, which climbs to 44th place from 47th thanks to big improvements in Cost of Doing Business and Business Friendliness.
Mississippi also moves out of the lower echelon solidly improving to 41st from 46th on its rock-bottom costs. The Magnolia State pays the nation’s lowest wages, and commercial space—particularly retail—is dirt cheap.
Joining the Bottom Five this year is Nevada, which finishes 46th, falling from 45th last year. The Silver State is still mired in the housing crisis, with the highest foreclosure rate in the nation. With the highest unemployment as well, it is no wonder Nevada finishes at the bottom of our Economy category. It also finishes at the bottom for Education, and near the bottom for Quality of Life and Access to Capital.
California, barrels into the Bottom Five this year, moving to 47th place from 40th last year. The Golden State has an apt nickname when it comes to Cost of Doing Business—California’s business costs are the most expensive in the country. In fact, the state finishes near the bottom in every metric of business costs that we track. But California is a land of extremes. No state comes close for Access to Capital, where California finishes first. And it finishes second, behind New York, for Technology & Innovation.
State 48 is West Virginia, unchanged from 2012. The Mountain State notches its worst numbers in the Workforce category, where it finishes last. Workers there are the nation’s least educated, population growth is stagnant, and the state’s heavy union presence—West Virginia is a non-right-to-work state—hurts it in the category. West Virginia also comes in last for Business Friendliness. Even in its strongest category, Cost of Doing Business, West Virginia can manage no better than 19th.
Rhode Island, the Ocean State, climbs ever so slightly out of the depths this year to 49th place. The state came in 50th last year. A perennial loser in our study, Rhode Island finishes near the bottom this year for Economy, Infrastructure and Business Friendliness. In fact, the state is in the bottom 10 in every category except for Cost of Doing Business where it comes in 32nd, Quality of Life at 20th and Access to Capital at 23rd.
America’s Bottom State for Business turns in a dismal performance across the board—almost.
It has the worst Infrastructure, the highest Cost of Living, minimal Access to Capital and among the highest Cost of Doing Business.
After we ranked the state near the bottom in 2012, an economic development official was quoted as saying, “We always rank at the bottom. It’s not something new.”
But the Bottom State does have one thing going for it: the nation’s Top Quality of Life. And with that, America’s Bottom State for Business 2013—Hawaii—gets the last laugh.
—By CNBC’s Scott Cohn. Follow him on Twitter @ScottCohnCNBC.