State Rankings, Small Businesses, School Quality and Economic Productivity

Posted on December 17, 2008



On a daily basis, in print media and on talk radio, I read and hear a lot of bombastic rhetoric about state rankings of small  business competitiveness  – the most frequent references of late to the Small Business Survival Index (SBSI).

http://www.sbecouncil.org/uploads/sbsi%202008%5B1%5D1.pdf

Nearly every component of this index deals with the tax and regulatory environment imposed by states. That is, it is assumed that the major reason one would want to start a business in one location versus another – New Jersey versus North Dakota – is the favorable state tax policy and regulation (minimum wage, etc.).

It would seem to me that this is a relatively limited if not utterly useless perspective. Indeed, among bordering states and within commutable regions at state boundaries such comparisons might be relevant. An individual who wishes to live in a particular region and/or recruit employees with specific skills that may be obtained within that region, might choose to open shop a few streets or miles away in the more favorable state.

However, from a broader, national perspective, issues such as access to human capital, intellectual and cultural environment are critical to at least some if not many small business and entrepreneurial endeavors.

Let’s consider, for the moment, the relationship between 3 different measures -

1. Small Business Survival Index

2. Gross State Product per Capita

3. The Percent of High Schools Achieving a Silver or Gold Rating from U.S. News

Across states, the correlations between these figures look like:

GSP and SBSI (higher is bad) = .1662

A weak correlation, but a positive one, suggesting that on average, states more “hostile” to small business have higher gross state product per capita. Hmm… how can that be?

GSP and % of High Schools Gold or Silver = .4406

A reasonable positive correlation and statistically significant.  Indeed states with more resources may be able to allocate more resources to providing high quality schools. That means taxes. Alternatively, and related, states with highly educated and productive adult populations may emphasize the importance of high level education to their children leading to not only higher participation but higher success rates on AP and IB tests (the underlying elements of the U.S. News HS Rankings).

SBSI and % of High Schools Gold or Silver = .3554

This is also a reasonably positive and statistically significant correlation, indicating that states with more high-end high schools have, on average, less favorable tax policy for small business.

Now… If I’m thinking of starting a small business that relies on intellectual capital and/or creative energy, and if I’m unlike most people and can choose to locate that start-up business anywhere in the country, then I get to make the trade-off decision as to whether I prefer favorable tax climate or intellectual capital and creative energy.

I may be wrong, but it strikes me that the latter is far more important to building a successful business. One might argue that the heavier tax burden is, in part, a premium one pays in order to be in a region with the creative, intellectual work force I need.

Further, if I want to recruit and retain an adult workforce that is going to stick with the business, I need to be recruiting them to work in an area where they feel comfortable raising their children and sending them to school.

In other words, I’m picking Massachusetts, New Jersey or California before South Dakota or Nevada, in spite of the wisdom presented by the authors of the Small Business Survival Index. Quite simply, small business survival is far more contingent on the quality (relevant qualities) of one’s workforce than on the marginal differences in tax policy.Small Business Surival and Educational EffortEducational Effort and % of HS Achieving Gold/Silver (US News)Small Business Survival Index and % Gold/Silver HS

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