The 5 Best and 5 Worst States to Start a Business

Opening a business and getting it off to a successful start can be challenge almost anywhere. Yet it remains true that businesses are most likely to thrive in environments that are conducive to doing business, something that can vary considerably from state to state. One key factor is the role of government. Are taxes high? Do businesses have to put up with a lot of expensive mandates and regulations? Whether or not you start your business in a business friendly state can make a real difference in whether your business venture ultimately succeeds or fails.

The Good and the Bad

One measure of which states have a favorable business climate is the State Business Tax Climate Index, a report released every year by The Tax Foundation. Not surprisingly, there are a great many factors and variables involved with determining which states are the best and worst for business. However, state tax rates seem to be a major indicator.


Here are the five states they determined to be the most favorable for business:

Wyoming – No income tax and an unemployment rate almost half the national average makes this state a paradise for both employers and workers.
South Dakota – Considered the entrepreneurial jewel of the midwest, South Dakota has no income tax and low unemployment.
Nevada – Once again, no income tax. However, the housing bust hit Nevada worse than most states, so unemployment remains above the national average.
Alaska – Our most northern state has a long libertarian tradition of pro-market policies that encourage business success. No income tax.
Florida – Another state hit hard by the housing slump, but rebounding fast. Does not have an income tax.

Here are the worst:

New York – Taxes and regulations abound, making this the worst state in America to start a business.
New Jersey – Copies the policies of New York.
California – Years of fiscal mismanagement and high taxes have taken their toll.
Vermont – Beautiful scenery but a hostile business climate.
Rhode Island – Another New England state done in by high taxes and heavy regulation.

Taxes Matter

Despite the many differences between the states, all of the five states deemed the best to do business in had no income tax. Conversely, all of the states determined to be bad for business had high income taxes. While it would be simplistic to say that income taxes are the only factor determining a state’s business climate, certainly it appears to be an important one.

One reason may be that states without income taxes attract people who intend to make money and would like to keep it. These are likely to be the most ambitious and hard working people, thereby creating a better than average pool of workers for businesses to draw upon. Finding good workers is an essential factor in business start up success. Businesses also need customers with money to spend, and workers in states with no income tax have more cash in their paychecks.

Therefore, the lesson may be that when looking for which states are best to start a business in, looking at that state’s income tax may be the single most important indicator of whether that state has a favorable business climate.