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Grading States on Small-Business 'Friendliness'

All else being equal, would-be entrepreneurs should consider moving to Idaho, Texas, Utah, or Virginia, and fleeing California, Illinois, and Rhode Island. The first four states received A+ grades for small-business “friendliness” in a study published this week by local services startup Thumbtack and the Kauffman Foundation. The last three states got Fs.

The research, based on more than 12,000 completed surveys, asked respondents to grade their cities and states on the ease of starting a business and hiring workers, the fairness of the tax code, and the impact of government regulation. Beyond the letter grades, the survey yielded some interesting results. The complexity and cost of obtaining business licenses was the most important issue for business owners. The bigger a business gets, the more owners are likely to believe they pay too much in taxes. Black business owners were more likely than whites to give their states high scores for being favorable to small business.

One thing the friendliness survey isn’t good at is predicting where people will start a business. California, despite a failing grade on business friendliness, had one of the most active startup rates in the country last year, according to an earlier Kauffman study.

Likewise, Virginia’s high marks in the small-business friendliness survey didn’t prevent more establishments from closing than opening in the year ended September 2013, the latest date for which U.S. Bureau of Labor Statistic is available.

The Thumbtack/Kauffman survey seems intended more as a way for cities and states to evaluate their policies than as road map for potential entrepreneurs. After all, there are lots of reasons why entrepreneurs choose one place or another to start a business, including market opportunity, the pool of workers with the right skills, and the most basic consideration—where a person wants to live.

Clark is a reporter for Bloomberg Businessweek.

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