Which States Are the Most Small Business Friendly?

Rhode Island and Illinois are among the worst states for small business owners, says a new survey, while Texas and New Hampshire are at the top.

A new survey of nearly 18,000 small business owners nationwide finds that entrepreneurs really want just one thing from government – simplicity.

Thumbtack.com‘s 2015 small business friendliness survey finds that the states ranked highest by small businesses are the ones that offer the easiest-to-navigate licensing and tax regimes, along with proactive help for entrepreneurs. What matters much less: the actual burden of taxes or regulation.

“The tax rate is often talked about, but it’s not a particularly meaningful measure,” says Thumbtack’s chief economist, Jon Lieber. “The amount paid in taxes matters significantly less than the complexity of the tax system and the difficulty people have complying.”

By these standards, the states ranked best in Thumbtack’s survey are Texas, New Hampshire and Utah, while the states ranked worst are Rhode Island, Illinois and Connecticut, along with New York and California.

Source: Thumbtack 2015 Small Business Friendliness Survey

The best states and cities, Lieber says, are the ones that “make it easy to start a business.” “What they’re doing right is not burdening small businesses with days and days or weeks and weeks of compliance,” he says. “They don’t charge unnecessary fees, and they get out of the way when it’s appropriate.”

The least friendly states, on the other hand, are the most bureaucratic. “Every time they want to expand, they run into a new regulatory problem,” Lieber says. “Every time they file any paperwork with the government, they hear different things from the agencies they’re talking to. And in some cases, especially at the local level, there’s outright corruption.”

But contrary to conventional wisdom, small business owners also told Thumbtack that they want more government help. Of particular importance is the user-friendliness of a state or city’s web portal for small business owners. According to Thumbtack’s survey, business owners who thought their city had a “great” website ranked their cities to be significantly more business friendly. Business owners said they also wanted more government-sponsored training opportunities for new entrepreneurs.

“When the government or a business organization offers training programs, it makes a huge difference in their eyes in how they perceive the friendliness of government,” says Lieber. “They see a lot of value in someone telling them, ‘This is how you file your taxes, this is where you go to get your zoning permit, this is how you do all the things you need to do be successful.'”

A recent resurgence in entrepreneurship might provide states the impetus to do more to help small businesses. According to the Kauffman Foundation, the rate of new business creation is at its strongest in two decades after years of decline. Between 2005 and 2010, the gross number of jobs created by new firms fell by more than 2 million.

Among the easiest policy reforms states can pursue, says Thumbtack’s Lieber, is to fix the occupational licensing hassles that many small business owners find troublesome.

“States have a problem with well-intentioned regulations that end up burdening the people who don’t have the time to comply with them,” Lieber says. “Licensing is a predominant example of this, where it acts as a barrier to entry to entrepreneurs and in some cases make very little sense.”

A new report from the Obama Administration concludes that unnecessary licensing requirements “raise the price of goods and services, restrict employment opportunities, and make it more difficult for workers to take their skills across State lines.”

The White House report finds that more than one-fourth of all U.S. workers now must be licensed – but that requirements are both uneven and potentially arbitrary. For example, the report says: “Michigan requires three years of education and training to become a licensed security guard, while most other States require only 11 days or less. South Dakota, Iowa, and Nebraska require 16 months of education to become a licensed cosmetologist, while New York and Massachusetts require less than 8 months.”

Moreover, the report finds, while states regulate more than 1,100 occupations, fewer than 60 are regulated in all 50 states. Only one state, for example, requires licenses for florists.

Inconsistencies such as these support what many experts believe: that many state licensing requirements are the result of political pressure more than concerns about public safety. “Why do we require hair braiders to be licensed in certain states?” asks Lieber. “It’s because the licensed hair braiders have formed into a political force that want to keep it that way.”

The better approach, Lieber says, is to put public safety first while also encouraging competition.

It’s exactly the kind of simplicity that small businesses say they need.

Anne Kim

Anne Kim is Senior Writer at the Washington Monthly.