Is Minnesota Nice to Small Business

The news that new job creation continues to slow is creating concerns among economists and politicians alike.  More and more of the evidence is suggesting that if you are truly concerned about job creation, you really need to focus on the needs of small businesses.  Why? According to the Small Business Administration, small businesses employ nearly half of all private sector employment and accounted for approximately two-thirds of the net new jobs created between 1993 and 2009.  More importantly, in our effort to speed our economic recovery along, it is helpful to remember that between the “dot-com” recession at the beginning of the decade and 2007, small businesses added almost 7 million jobs, while larger businesses with 500 employees or more actually shed close to 1 million jobs.  Lesson … if job creation is the goal, focus on creating an environment that supports small business development.

So it was with this in mind that I reviewed the results of a new research report on the friendliness of the states toward small business development.  The research, which surveyed more than 6,000 small businesses all across the U.S., was conducted by Thumbtack.com in partnership with the Ewing Marion Kauffman Foundation.  The study actually examined 12 separate dimensions of “business friendliness” for small businesses; from ranking the friendliness of a state’s licensing regulations to the friendliness of its tax code.  Not surprisingly, the findings that made the headlines in the press release was that Texas, Idaho, Utah and Oklahoma were the most friendly states for small businesses, while California, Hawaii, Vermont and Rhode Island were the least friendly.  In fact, California was home to the three least friendly cities to small businesses; Los Angeles, San Diego and Sacramento.

But aside from the rankings, what I found most interesting was the finding that small businesses in the study reported that licensing and regulatory requirements were nearly twice as important as tax-related regulations in determining overall business friendliness.  This finding reminded me of a study conducted last year by U.S. Bank Corp. where they also found that among the concerns of small businesses, only 8 percent reported that taxes were a primary concern.  So why are small businesses more concerned about the regulatory environment than they are about taxes?  Well I would suggest two reasons:  first, most small businesses are just that – small.  Most have few employees and modest sales revenues; therefore in most states taxes are not such a burden.  On the other hand according to the Small Business Administration, these same small firms with 20 or fewer employees actually spend 36 percent more per employee than larger firms trying to comply with federal regulations.  Simply put, complying with environmental, health and licensing regulations are disproportionately more expensive for smaller firms.  Therefore, when examining the friendliness of the business climate for small business, entrepreneurs focus more on the regulatory environment than taxes.

So how “friendly” is Minnesota to small businesses?  Well overall, the report gave Minnesota a solid grade of “B” ranking 18^th out of all the states.  Minnesota seemed to rank higher on the cost of hiring new employees; ease of starting a small business; zoning regulations; and the availability of training programs.  Conversely, Minnesota didn’t rank as well in licensing regulations and the friendliness of the tax code. The city of Minneapolis itself ranked 15^th out of the 40 major cities examined in the study, ranking high in the cost of hiring new employees and the ease of starting a new business.  Clearly, while the state ranked reasonably well in this study, we certainly can strive to do better.

Political and civic leaders should be encouraged to take a moment to consider the implications of this and similar studies.  While political leaders from both sides of the aisle may have difficulty agreeing on a variety of issues, both Republicans and Democrats alike want to improve the environment for small businesses.  In fact, the study’s authors examined these rankings by the political orientation of the entrepreneurs and found that there was very little difference across the political spectrum (i.e., conservative, moderate or liberal) in terms of how respondents ranked the friendliness of their states.

I am reminded that early in the 2012 legislative session our Republican-led legislature and our Democratic Governor found common ground in passing a bill to expedite environmental permitting.  With that in mind I might suggest that if our legislators are interested in finding bipartisan issues to work on in 2013, they may wish to start by focusing on improving the environment for small businesses throughout Minnesota.