Entrepreneurship Index Misses the Mark When Comparing States

The University of Nebraska-Lincoln Bureau of Business Research recently published “The 2013 U.S. State of Entrepreneurship Index” highlighting which states were best at providing an economic environment for entrepreneurs to succeed. According to this Index, the top five states with “business startups and failures compared to population, innovation, and income” are North Dakota, California, New York, Kentucky, and New Hampshire.

Despite being ranked the best place to do business for ten consecutive years by the Chief Executive Magazine and ranking much higher (11th) in the Tax Foundation’s business tax climate index than states like California (48th) and New York (50th), the Entrepreneurship Index ranks Texas behind these states at 7th.

Let’s consider why this Index misses the mark when it comes to adequately comparing the entrepreneurial environment among states.

The graphic below shows how the 50 states compare based on the Index that considers five equally weighted factors: 1. State’s net growth in business establishments; 2. Per capita growth in business establishments; 3. Business formation rate; 4. Number of patents per thousand residents; and 5. Average income for non-farm proprietors.

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These rankings are perplexing given the fact that Texas has been the nation’s leader in job creation and companies continue to relocate from other states, particularly California. The Texas miracle has a strong foundation of zero income tax, low overall tax burden, and sensible regulation that have fostered an environment to move Texans out of poverty and into prosperity. As examples of this success, recent state-level employment data show that Texas led all states with almost 400,000 jobs created during the last year and the Lone Star State’s unemployment rate of 5.3 percent in August 2014 has been at or lower than the national rate for 92 consecutive months.

While the Entrepreneurship Index provides some information, it does not consider whether these business ventures are successful. The state’s fiscal policy choices have an effect on the amount of taxes an entrepreneur will have to pay which certainly affects their success. A recent Texas Public Policy Foundation report shows that during the 2001 to 2011 period the nine states without a personal income tax, including Texas and New Hampshire, performed substantially better economically than the national average and the nine states with the highest personal income tax rates, including Kentucky, New York, and California.

From this anecdotal evidence, the Entrepreneurship Index may provide some valuable information about the status of state’s ability to foster entrepreneurial activity, but it does not indicate which states provide the best environment for firms to succeed and their citizens to prosper. An entrepreneur may be able to innovate in places with high taxes and regulations such as California and New York, but too many of these ideas are stifled because the state gets in the way.

This is less the case in Texas that allows innovators the freedom to generate new ideas and succeed in a policy environment with sensible regulations and low taxes. There is more work for the Texas Legislature to do next session to keep Texas humming forward, such as eliminating the margin tax and lowering the bottom line of spending while providing tax relief for all Texans.