When Research in Motion, the maker of the popular Blackberry phones, wanted to build out its U.S. headquarters, it selected Irving, Texas for the site of a 100,000-square-foot facility it expects will soon employ 1,000 people. In January, communications equipment maker Setcom decided to pick up stakes and move from its longtime home in Mountainview, California to Austin, Texas. In 2007, Comerica left Detroit for Dallas. At the time, chairman and CEO Ralph Babb cited Texas’ economy, talented workforce, and central location as the reasons behind the move.
These companies are finding out what corporate giants such as Dell, Exxon Mobil, AT&T, and EDS have long known: that when it comes to business, Texas is number one.
What puts Texas first? It has a pro-business tax climate that ranksthird, a low cost of living, a relatively solid economy, and alitigation environment that ranks 10th on our list. Texas also ranksfirst in the number of Fortune 500 companies located there.
The Lone Star state tops our annual Boardroom Guide to the Best States for Business. The guide is an outgrowth of our annual Litigation Guide, which assesses the litigation climate in each of the 50 states (Page 28). We decided to produce a more comprehensive resource for boards by adding data on the economy, tax climate, cost of living, education, and other measures to arrive at the ranking.
What puts Texas first? It has a pro-business tax climate that ranks third, a low cost of living, a relatively solid economy, and a litigation environment that ranks 10th on our list. Texas also ranks first in the number of Fortune 500 companies located there. We used the Fortune rankings as one measure of attractiveness to large companies and an indication of strong infrastructure. Texas’ central location and time zone also make it an ideal hub, especially for companies with a national distribution or customer footprint. Recently, companies such as Toyota and Caterpillar have located portions of their business in Texas.
“Our commitment to low taxes, predictable regulations, and a fair tort system are setting an example for the nation and creating a magnetic force for the businesses and jobs that are vital to maintaining Texas’ competitive advantage in the global marketplace,” says Texas Governor Rick Perry.
“It’s not surprising that Texas does well in these types of rankings,” says Hartley Powell, national leader of the global location and expansion services practice at KPMG LLP. “They have been very successful over the years at broadening their base from energy into areas such as high tech and manufacturing.” Powell says Texas has a quality labor force and a good tax structure for business.
Rounding out the top five states overall are Virginia, Utah, South Dakota, and Nebraska, home to Warren Buffett’s Berkshire Hathaway. Virginia has recently become a favorite business destination. Last year, Computer Sciences Corp. left El Segundo, California, for Falls Church, Virginia. “Virginia is a very good state for business,” says Powell. “They have been aggressive and have done a good job attracting companies to the state.” In our ranking, Virginia is in the top 10 on quality of life, higher education, economy, and the state litigation ranking, making it a very balanced state across the board.
One up-and-coming state, according to some of the experts we talked to, is Tennessee. The Volunteer State ranks 9th on our list, with the lowest cost of living in the nation and a litigation climate that is third best. In 2005, Nissan moved its North American headquarters from California to a suburb of Nashville.
Tax Climate
One important component of any business relocation effort is the tax structure of states being considered. “In the last few years, tax climate has become more important as companies have become more cost conscious,” says Powell.
The rankings use a tax-climate measure put together by the Tax Foundation, a non-profit, nonpartisan research group that has been assessing tax conditions since 1937. Joseph Henchman, director of state projects at the Foundation, says the group’s rankings include more than 100 factors related to the tax structure and burden of each state. He says the factors measure how simple, neutral, transparent, and stable a state’s tax system is. At the top of the Tax Foundation’s list is Wyoming, which ranks 16th overall on our list. “Wyoming does well from a tax perspective, more for what it doesn’t have than for what it does,” says Henchman. The Equality State does not have a corporate income tax or a personal income tax. Two other states, Nevada and South Dakota, do not have a corporate income tax. “That tends to be a magnet for companies to want to do business there,” he notes.
Apart from low rates or the absence of certain taxes, Henchman says companies are looking for simplicity in complying with state tax laws. “Colorado has every tax, but it has low rates and they are broadbased,” says Henchman. Spending on compliance with state tax laws can be nearly as expensive as the taxes themselves, he says.
The Bottom Dwellers
States at the bottom of the list for tax climate include New Jersey, New York, and California. Companies doing business in these states are there for other reasons, such as access to capital or a skilled workforce. “Businesses have located there for other reasons, but increasingly they are leaving these states because of the tax and regulatory burden,” says Henchman. He says California is experiencing what he calls a “brain drain” to nearby states like Nevada and Arizona. States with complex state tax laws, according to the Tax Foundation, include Ohio, Michigan, California, and New York.
The lowest performing states in our ranking overall are West Virginia, Rhode Island, Kentucky, New Mexico, and Hawaii. To be sure, West Virginia does not have a lot going for it when it comes to attractiveness to business. The state ranked next to last on higher education—based on the percent of the population over age 25 who hold college degrees—the economy, and the state’s litigation climate. The lone bright spot for the Mountain State was cost of labor, where it ranked third. Another low-ranking state, Rhode Island, performed poorly on litigation and tax climate, but change may be coming. “Rhode Island has a high corporate income tax, but the legislature is working on trying to do something about it,” says Henchman.
With the rankings, a caveat must be noted: States can vary dramatically from one part or city to the next, and, while a state might not perform well in the state-by-state rankings, there may be areas that are very attractive to specific industries. Alabama is a good example. While it only ranks 37th on our list, it has been extremely successful at luring auto manufacturing to certain areas of the state. “Companies don’t really locate business in a state, they locate them in a community,” says Powell.
Methodology
The state rankings in the Boardroom Guide to the Best States for Business were compiled using eight major indices of attractiveness to business. The Litigation Climate ranking is our own measure, assembled with the help of the Foundation for Fair Civil Justice. Because of its importance to directors, this measure is weighted at twice the score of the other measures, which are equally weighted. The other components are: a measure of large-company attractiveness and infrastructure based on the presence of Fortune 500 companies; a measure of business tax climate conducted annually by the Tax Foundation; a cost-of-living ranking from CNBC Best States for Business 2008; a cost-of-labor ranking from the Bureau of Labor Statistics; an indicator of state economic performance from the Bureau of Economic Analysis; an indicator of higher-education prevalence by the Census Bureau; and measure of quality of life from Forbes. States were ranked from 1 to 50 on each measure and then scored based on the rankings.
Good afternoon,
My name is Haney Hong, and I’m a graduate student at the Harvard Kennedy School. I was wondering if I might be able to chat with someone about the methodology utilized in the “Best States for Business” rankings, and more specifically, the litigation report component of that ranking methodology. I appreciate your time.
Best,
Haney Hong