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Utah ranks 26th among the fifty states and District of Columbia for small business survivability, according to the Small Business and Entrepreneurship Council (SBE Council); a non-profit small business advocacy group which has more than 70,000 members nationally.
The Eleventh Annual Small Business Survival Index of 2006 ranks the fifty states and District of Columbia using nearly 30 indicators of how state and local governments treat small businesses and entrepreneurs. The Beehive State’s 26th ranking compares unfavorably with most of the states surrounding Utah. Nevada and Wyoming rank 2nd and 3rd respectively while Colorado ranks 8th, and Arizona 15th. New Mexico ranks only slightly behind Utah at 29th while Idaho comes in at a more unfriendly 34th place.
The top ten states in the ranking in order of business friendliness are South Dakota, Nevada, Wyoming, Alabama, Washington, Florida, Mississippi, Colorado, Texas, and Michigan. The bottom ten states in order of the most business unfriendly are District of Columbia, New Jersey, California, Rhode Island, Maine, Minnesota, New York, Hawaii, Massachusetts, and Vermont.
The index combines economic indices from various sources which reflect the governmental burden impacting critical economic decisions of small businesses and entrepreneurs. When the indices are added together, they constitute the index number for each state, similar to the old “misery index” which added the rates of inflation and unemployment.
The 28 measures used in the index together with Utah’s value and rank for each indicator are shown below.
Personal Income Tax ( Utah top “effective” rate 5.775% – 24th best). The SBE Council uses this measure because they say roughly 90 percent of businesses file taxes as individuals, including sole proprietorships, partnerships, and S-Corps. Utah’s top rate is actually 7%, but when income is adjusted for deductions and exemptions, and tax credits are included, the top effective rate is 5.775%. (This does not reflect 2006 changes which enacted a dual income tax system including an optional flat rate of 5.35% and a graduated system with a top bracket of 6.98%.)
Capital Gains Tax ( Utah top rate 6.475% – 36th best). SBE Council uses this measure because state capital gains taxes are direct levies on investment and entrepreneurship – the source of growth in the economy. They note that high capital gains taxes restrict access to capital, and either dampen or redirect risk taking.
Corporate Income Tax ( Utah top effective rate 5% – in a three way tie for 9th best). SBE Council says state corporate income taxes affect a broad range of business decisions, including decisions relating to investments and location.
Additional Income Tax on S-Corporations ( Utah imposes no such taxes and thus receives a favorable rating of “0”). Subchapter S Corporations allow certain businesses to adopt the benefits of a corporation, while allowing income to be taxed at the individual level. Few states actively tax S Corporations, a practice that again raises costs and restrains investment.
Individual Alternative Minimum Tax (States which impose the AMT are given a score of “1” while states like Utah which do not have an AMT receive a zero score, producing a favorable rating on this measure). The individual alternative minimum tax (AMT) is anti-growth, according to SBE Council. The AMT imposes a minimum tax rate that must be paid by individuals, regardless of tax credits or deductions taken.
Corporate Alternative Minimum Tax ( Utah does not have an AMT and therefore receives a zero score which gives a favorable rating on this measure). Similar to the Individual AMT, the corporate AMT diminishes the effectiveness of potentially positive, pro-growth tax relief measures.
Indexing Personal Income Tax Rates (The SBEC gives Utah a “1” or unfavorable score on this measure because Utah lacks a permanently indexed its income tax.) The Utah Taxpayers Association has worked to convince the legislature to index our income taxes for inflation or enact a flat income tax which eliminates brackets and therefore eliminates bracket creep.
Property Taxes ( Utah property taxes as a percent of personal income are 2.59% – tied for 13th best, a nominal improvement since 2003). The SCE Council used this measure because property taxes influence where businesses and entrepreneurs choose to locate, as well as decisions relating to investments in businesses, facilities, and homes.
Sales, Gross Receipts and Excise Taxes ( Utah sales taxes as a percent of personal income are 3.77% – 36th best. This is also an area of some improvement since 2003). State and local sales, gross receipts and excise taxes impact the economic decisions of individuals and families, as well as businesses. High consumption-based taxes, especially if combined with other taxes like income and property taxes, can serve as real disincentives to productive economic activity, according to SCE Council.
Death Taxes ( Utah death taxes do not exceed the federal tax credit, therefore we get a favorable zero rating on this measure). SCE Council believes that for small businesses, death taxes amount to nothing more than a government hostile takeover at death.
Unemployment Tax Rates (Utah maximum rate 6.58% of pay, up from 5.93 in 2003 ranks as 51 st best—the worst in the nation). Some argue that Utah’s ranking in this study is unfairly presented because a high maximum rate does not reflect our more moderate average rate. In fact, states with lower maximum rates tend to socialize more of the costs of unemployment, giving employers less incentive to avoid impacting the system with layoffs. The SBE Council believes the unemployment tax on wages is another burden on entrepreneurs and business. High state unemployment tax rates increase the relative cost of labor versus capital, and provide incentives for labor-intensive businesses to flee from high-tax states to low-tax states.
The Health Care portion of the SBE Council study has been recently revamped, now using 4 different indicators of health care costs instead of only one.
Health Care Regulation: Guaranteed Issue for Small Groups ( Utah guarantees that individuals cannot be turned down for health insurance coverage, resulting in an unfavorable rating of “1”). Health care represents a significant cost for businesses. Since state law guarantees insurance despite a person’s health or risk status, there is a disincentive to procure insurance before a person is ill. The SBE Council argues that this practice raises rates for all consumers.
Health Care Regulation: Guaranteed Issue for Self-Employed Group of One ( Utah ranks well in this category with a score of zero). Again, guaranteed issue mandates raise health costs for all, in this case for the self-employed.
Health Care Regulation: Community Rating ( Utah is given a rating .33 out of possible score of “1,” which would represent a pure system of community rating). Community rating mandates require insurers to charge the same price for everyone in a defined region, despite the existence of any other applicable risks. Utah uses rate bands. While not an explicit community rating system, this practice still may raise health care cost across the board
Health Care Regulation: Number of Mandates ( Utah received a score of 1.05, which ranks 4 th in the nation). The SBE Council gives a score of .05 for each mandated benefit given by a state to insurers. While such mandates to offer care often seem reasonable, the SBE argues that many of them carry significant cost, which is often transferred to businesses owners.
Electricity Costs ( Utah 69 cents average revenue per kilowatt hour – Tied for 7th best). Obviously, every business uses electricity, and for some, electricity costs are the second or third largest expense after labor. High electricity rates due to hefty taxes and heavy-handed, misguided regulations can play a significant part in business decision-making.
Workers’ Compensation Costs ( Utah workers’ compensation benefits are 0.67% of covered wages – 5th best). High workers’ compensation rates impact the economy in much the same way as high unemployment tax rates. The cost of labor relative to capital is increased, and incentives for labor-intensive businesses to flee are clear.
Total Crime Rate ( Utah’s crime rate is 4.32 crimes per 100 persons – tied for 30th lowest overall). Just like taxes, a high crime rate acts as a disincentive to entrepreneurs. If government is unable to adequately protect lives and property — the fundamental function of any government — then entrepreneurs and businesses will flee to safer environments.
Right to Work ( Utah is a right to work state and therefore receives a favorable zero score.) A right-to-work state is one in which employees generally are not forced to become labor union members or pay dues to unions. Such worker protections offer a more dynamic, flexible workforce in the state, which translates into an amenable environment for increased productivity and improved efficiency.
Number of Bureaucrats (State & Local government employees as a percent of state population is 5.17% – 12th best). Regulatory costs are difficult to assess in a uniform, comparative measure from state to state. One rough measure for regulations is the number of state and local government employees—or bureaucrats. After all, with regulations, rules, and mandates come regulators, which raise the costs of doing business. A large number of government employees also means that a significant share of individuals are performing far less productive work than if they were in the private sector.
Tax Limitation States ( Utah does not have a supermajority requirement and therefore receives an unfavorable “1” score.) Requiring supermajority votes, whether for elected officials or voters in general, in order to increase or impose taxes, serves as a solid check on the growth of taxes and government in general. According to Americans for Tax Reform, both taxes and spending do in fact grow more slowly in supermajority states, and economies expand faster in such states.
Internet Taxes ( Utah does not impose any Internet access taxes and therefore gets a favorable zero score.) The Internet serves as a tremendous boost to economic growth and a great expansion of economic opportunity. For small businesses, the Internet allows for greater access to information and markets. Indeed, the Internet gives smaller enterprises access to global markets that they might not have had in the past. Unfortunately, some states have chosen to impose sales taxes on Internet access.
Gas Tax (SBE Council reports Utah’s gas tax at 24.5 cents per gallon – tied for 28nd best. This is another area of improvement, three year ago the state ranked 32nd). Every business is affected by the costs of operating motor vehicles–from trucking firms to the home-based business paying for delivery services. State government impacts these costs through taxes on motor fuels.
State Minimum Wage ( Utah’s minimum wage law is no higher than the federal minimum wage and therefore Utah receives a favorable zero rating.) In the end, the minimum wage raises costs for businesses—particularly harming smaller firms—while also hurting young, low-skilled, low-income workers by too often denying them the work experience necessary to climb the ladder of economic opportunity. Some states actually impose a state minimum wage that is higher than the federal minimum wage.
State Legal Liability Costs (SBE Council reports Utah at 1.4 on this particular index, ranking in a five way tie for 11th best) The SBE Council believes costs of litigation loom heavily over all businesses. They believe frivolous and costly lawsuits plague businesses across the nation, hurting investment, job creation and the overall economy.
Regulatory Flexibility Status ( Utah has partially used regulatory flexibility statutes and receives a score of .5). The SBE Council has pushed states to pass their own versions of the Federal Regulatory Flexibility Act. The idea behind this legislation it to require state agencies to asses the economic impact of a regulation before imposing it. Often this can lead to the adoption of less burdensome alternatives.
Trend in State and Local Government Spending (Utah had an average .64% increase in government spending growth over 5 years, which ties for 4 th best nationally with Hawaii and Oregon). Taxes are directly tied to the amount of government spending. This first funding category captures recent trends in the amount of a state’s spending growth, and perhaps their future tax policy
Per Capita State and Local Government Spending ( Utah is given a score of .89 in this category, which ranks 19 th nationally). This measure normalizes spending in terms of population
Protecting Private Property/Eminent Domain ( Utah is given a rating of “1” meaning eminent domain is limited to public use). The SBE Council scale for this category goes from 0-3. A higher score indicates a property owner is more at risk to be subject to ejection under the auspice of eminent domain. The SBE council believes that economic development is hampered when the government fails to protect the rights of private property owners. After the Supreme Court expanded the use of eminent domain in 2005, the council decided to add this category to the overall index.
While the SBE Council index is a somewhat crude measure of states’ friendliness to small businesses, it does help to point out areas in which Utah could improve to become a safer place for small businesses to locate and expand. The index can be accessed on the web at www.sbecouncil.org .
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