OLR Research Report


October 10, 2013

 

2013-R-0374

CONNECTICUT AND DELAWARE BUSINESS CLIMATES

By: John Rappa, Chief Analyst

You asked how organizations rank state business climates and how their rankings for Connecticut and Delaware compare.

SUMMARY

At least 12 organizations annually rank states from 1 to 50 based on their economic strengths and weaknesses, with 1 indicating the best economic or business climate and 50 the worst. The organizations base their rankings on different economic criteria reflecting different theories about the forces driving and sustaining economic growth.

Although all the organizations rank Delaware ahead of Connecticut, the margin varies depending on their focus. It is generally wider in those studies that rank the states based on business cost factors, such as taxes and regulations, and narrower in those that use other types of criteria, such as the rate at which people start new businesses and the share of workers holding information technology (IT) jobs.

Although the studies focus on different factors, none differentiate between different types of businesses. Doing so might show how a state's business climate could vary, depending on a business' size, sector, or other characteristics. For example, Delaware (14) ranks higher than Connecticut (40) in the Tax Foundation's 2013 State Business Tax Climate, which assesses how different types of taxes generally affect businesses. But Connecticut's rankings are better in the Foundation's 2012 Location Matters: A Comparative Analysis of State Costs on Business, which focuses on how taxes affected seven types of new and older businesses, including research and development (R&D) facilities and capital-intensive manufacturing firms.

In the latter study, Connecticut's overall rank is higher than Delaware's with respect to older firms (i.e., those that have been operating for at least 10 years), 21 to 24, respectively. (But Connecticut's rank is lower than Delaware's (30 to 16, respectively) with respect to new firms (i.e., those that have been operating for less than three years)). The study also ranks the states with respect to each type of new and older business. Connecticut ranks higher than Delaware with respect to several types of businesses, including new and older R&D facilities and older capital- and labor-intensive manufacturing firms.

OVERALL RANKINGS

Many organizations provide a single overall ranking for each state and several sub-rankings for each group of criteria they use to determine the overall rankings. This combination of overall and sub-rankings make up each study's ranking structure. Table 1 describes these structures and compares Connecticut's and Delaware's overall rankings. As the table shows, all of the organizations rank Delaware higher than Connecticut.

1. Five organizations rank Delaware among the top 25 states, including the Information Technology & Innovation Forum (ITIF), which ranks Delaware 2nd. Only one organization—ITIF—ranks Connecticut among the top 25 states (9th).

2. Six organizations rank Delaware among the bottom 25 states while 10 place Connecticut in this category.

3. Four organizations rank Connecticut and Delaware relatively close together—ITIF (9th and 2nd, respectively), Corporation for Enterprise Development (CFED) (29 and 22, respectively), U.S. Chamber of Commerce (30 and 36, respectively), and Small Business and Entrepreneurial Council (42 and 33, respectively).

Table 1: Comparison of Connecticut's and Delaware's Rankings in Business Climate Studies

Ranking Organization

Publication

Basis of Ranking

Rankings Structure

Year

Selected States' Rankings*

CT

DE

American Legislative Exchange Council (ALEC)

Rich States, Poor States: ALEC- Laffer State Economic Competitiveness Index, 6th Edition: Economic Outlook Rankings

Identify state policies leading to economic prosperity

15 equally weighted policy areas state lawmakers directly influence, including taxes and labor costs

2013

43

30

Rich States, Poor States: ALEC- Laffer State Economic Performance Rankings

1. Gross state product

2. Absolute domestic migration

3. Growth in non-farm payroll employment

2001-2011

46

26

Beacon Hill Institute

12th Annual State Competitiveness Report

Quality of business environment based on microeconomic variables

45 indicators grouped into eight policy areas, including government and fiscal policies and security (i.e., crime)

2012

33

17

Business Facilities Magazine

State Rankings: Business Climate

Business climate

Combination of key rankings, including education, labor, and taxes

2013

Not included in top 10

Not included in top 10

Chief Executive Magazine

2013 Best and Worst States for Business

Business climate

Surveys asking CEO to rate states based on taxes and regulations, workforce quality, and living environment

2013

45

27

CNBC

Top States for Business

Competitiveness

55 metrics grouped into 10 broad categories, including business costs, infrastructure, and capital access

2013

45

31

Corporation for Enterprise Development (CFED)

CFED Assets and Opportunities Scorecard

Financial security and economic opportunity

16 grouped into five categories, including financial assets and income and education

2013

29

22

Forbes

Best States for Business

Business climate

35 data points grouped into six categories, including business costs and regulatory environment

2013

39

20

Information Technology & Innovation Forum

The State New Economy Index: Benchmarking Transformation in the States

Extent to which states' economic structure foster knowledge and innovation (i.e., the New Economy)

26 indicators divided into five categories, including knowledge jobs and innovation capacity

2012

9

2

Site Selection Magazine

Top Ten 2012 State Business Climates

Business climate

Survey questions posed to corporate real estate executives and tax burden index

2012

Not included in top 10

Not included in top 10

http://www.siteselection.com/issues/2012/nov/top-business-climates.cfm

Small

Business & Entrepreneurship Council

U.S. Business Policy Index

Public policies affecting business climate

46 major government-imposed or government-related costs impacting small businesses and entrepreneurs across business sectors

2012

42

33

Tax Foundation

State Business Tax Climate Index

State business tax climate

118 variables divided into five hierarchically ordered components, ranging from individual income tax to unemployment insurance

2013

40

14

U.S. Chamber of Commerce Foundation

Enterprising States: Getting Down to Small Business

Economic performance and job growth and prosperity policies

33 variables grouped into six categories, including exports and international trade and talent pipeline

2013

36

30

*Rank of 1 is better for businesses than rank of 50.

The differences in the selected states' overall rankings reflect differences in the criteria the organizations use to measure economic strengths and weaknesses.

1. Delaware ranks higher than Connecticut by a wider margin (i.e., 10 or more ranks) for those organizations that focused on taxes, labor costs, regulatory burden, and other factors directly affecting business costs (e.g., American Legislative Exchange Council's Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index and Tax Foundation's State Business Tax Climate Index).

2. The margin is narrower (i.e., 9 or fewer ranks) for those organizations that focus mainly on non-cost factors, such as family financial assets and income (i.e., CFED's Assets and Opportunity Scorecard) and “knowledge jobs” (ITIF's The State New Economy Index: Benchmarking Transformation in the States).

Attachment 1 highlights the variables used by these and the other ranking organizations.

SUB-RANKINGS

Comparing how the 12 organizations rank Connecticut and Delaware becomes more complicated when the focus shifts from their overall rankings to their sub-rankings. Doing so reveals how an organization can give a state a relatively poor overall ranking and relatively better sub rankings, an outcome that usually results from differences in how the studies grouped and weighed the ranking criteria.

For example, ALEC's Rich States, Poor States: ALEC-Laffer State Competitiveness Index 6th Edition (2013) overall rankings are based on 15 equally weighted “policy areas that are directly influenced by state lawmakers,” such as taxes, government spending and debt service, and labor costs.

Table 2 shows how ALEC ranks Connecticut and Delaware in each of these areas. Connecticut does better than Delaware with respect to highest marginal personal and corporate income tax rate, personal income tax progressivity, sales tax burden, debt service as a share of tax revenue, and public employees per 1,000 residents.

Table 2: Comparison of the Selected States Sub Rankings in the Rich States, Poor States ALEC-Laffer State Economic Competitiveness Index

Rankings

Selected States Rankings*

CT

DE

Overall Economic Outlook Ranking

43

30

Policy Variables:

   

Highest Marginal Personal Income Tax Rate

29

41

Highest Marginal Corporate Income Tax Rate

40

47

Personal Income Tax Progressivity

25

43

Property Tax Burden

43

4

Sales Tax Burden

11

1

Tax Burden from All Remaining Taxes

10

50

Estate/Inheritance Tax (Yes or No)

50

50

Recently Legislated Tax Policy Changes (Over the past two years)

49

8

Debt Service as a Share of Tax Revenue

26

36

Public Employees per 10,000 Residents

17

28

Quality of State Legal System

25

1

Workers' Compensation Costs

45

21

State Minimum Wage

49

1

Right-to-Work State

50

50

Tax or Expenditure Limits

15

4

*Rank of 1 is better for businesses than rank of 50.

Differences between overall and sub-rankings also appear when organizations rank states based on criteria other than business costs. For example, ITIF's three-tier ranking reflects its concern about the nation's ability to create and sustain the types of jobs needed to compete in the global economy.

Comprising ITIF's third or lowest tier are 26 weighted indicators that “assess each state's fundamental capacity to navigate the shoals of economic change” (p. 9). ITIF ranks the states for each indicator and then groups the indicators into five categories, which constitute the second or middle tier. Its overall rankings—the first or top tier—are based on its second and third tier rankings.

Table 3 describes ITIF's ranking scheme, including the weights it assigns to each indicator and indicator category.

1. Delaware's overall (first tier) rank is higher than Connecticut's (2nd to 9th, respectively).

2. Delaware's rank is also higher than Connecticut's in four of the five (second tier) categories, the exception being “Knowledge and Jobs,” in which Connecticut ranked 4th and Delaware 11th.

3. Connecticut ranks higher than Delaware with respect to half of the 26 third-tier indicators, including workforce education, initial public offerings, online agriculture, and reducing energy consumption and relying more on clean energy (i.e., movement toward a green economy).

Table 3: Comparison of Selected States Sub-Rankings in ITIF's The 2012 State New Economy Index

Rankings

Weight

Selected States Rankings*

CT

DE

Overall Score

 

9

2

Category and Indicator Scores

     

Knowledge and Jobs

5.00

4

11

n Information Technology Jobs

0.75

12

3

n Managerial, Professional, and Technical Jobs

0.75

4

20

n Workforce Education

1.00

4

23

n Immigration of Knowledge Workers

0.50

38

40

n Migration of U.S. Knowledge Workers

0.50

8

27

n Manufacturing Value Added

0.75

9

22

n High-Wage Traded Services

0.75

3

1

Globalization

2.00

8

1

n Foreign Direct Investment

1.00

3

2

n Export Focus of Manufacturing and Services

1.00

23

2

Economic Dynamism

3.50

21

18

n Job Churning

1.00

50

12

n Fast Growing Companies

0.75

8

7

n Initial Public Offerings

0.50

5

32

n Entrepreneurial Activity

0.75

25

38

n Inventor Patents

0.50

7

31

The Digital Economy

3.00

10

7

n Online Population

0.50

20

33

n E-government

0.50

25

25

n Online Agriculture

0.50

3

34

n Broadband Telecommunications

1.00

11

1

n Health IT

0.50

15

15

Innovation Capacity

5.00

9

4

n High-Tech Jobs

0.75

15

12

n Scientists and Engineers

0.75

14

9

n Patents

0.75

12

2

n Industry Investments in R&D

1.00

3

1

n Non-Industry Investments in R&D

0.50

39

48

n Movement Toward a Green Economy

0.50

6

27

n Venture Capital

0.75

23

25

*Rank of 1 is better for businesses than rank of 50.

FACTORING IN BUSINESS SIZE

The Tax Foundation's research shows how state rankings could change, depending on how a tax affects different types of businesses. In its 2012 Location Matters: A Comparative Analysis of State Costs on Business, the Tax Foundation ranked states based on how their taxes affect 14 types of hypothetical businesses: seven new and seven older: (1) corporate headquarters, (2) R&D facilities, (3) retail stores, (4) call centers, (5) distribution centers, (6) capital-intensive manufacturing firms, and (7) labor-intensive manufacturing firms. It provided overall rankings for new and older businesses and sub-rankings for each type of new and older business.

Table 4 compares the Foundation's (1) overall rankings for Connecticut and Delaware and (2) these rankings with those of the Foundation's 2013 State Business Tax Climate Rankings. As the table shows, Connecticut, which ranks below Delaware in the tax climate study, ranked higher than Delaware in the location matters study with respect to older firms.

Table 4: Comparison of Selected States' Overall Location Rankings

Selected

States

2012 Location Matters Rankings

2013 State Business Tax Climate Index Ranking*

Older Firms

New Firms

CT

21

30

40

DE

24

16

14

*Rank of 1 is better for businesses than rank of 50.

The Foundation also ranks the states based on how their tax system affected each type of business. As Table 5 shows,

1. Connecticut's tax burden is lighter than Delaware's with respect to (a) new and older R&D facilities, (b) older retail stores, and (c) older capital- and labor-intensive manufacturing firms and

2. Delaware's tax burden is lighter than Connecticut with respect to (a) new and older corporate headquarters, (b) new retail stores, (c) new and older call distribution centers, and (d) new capital- and labor-intensive manufacturing firms.

Table 5: Comparison of Selected States Rankings for Each Business Type

Business Type

Ranking*

CT

DE

Corporate Headquarters:

   

Older

42

17

New

40

18

R&D Facility:

   

Older

21

44

New

35

37

Retail Store:

   

Older

32

45

New

29

22

Call Center:

   

Older

38

28

New

37

17

Distribution Center:

   

Older

29

30

New

34

37

Capital Intensive Manufacturing:

   

Older

9

17

New

25

42

Labor Intensive Manufacturing:

   

Older

6

10

New

18

43

*Rank of 1 is better for businesses than rank of 50.

JR:ro

Attachment 1: Comparison of Ranking Criteria in Selected States Business Climate Studies

American Legislative Exchange Council: Rich States, Poor States: ALEC- Laffer State Economic Competitiveness Index, 6th Edition: Economic Outlook Rankings

American Legislative Exchange Council: Rich States, Poor States: ALEC- Laffer State Economic Performance Rankings

Beacon Hill Institute: 12th Annual State Competitiveness Report

Business Facilities Magazine, State Rankings: Business Climate

Chief Executive Magazine,

2013 Best and Worst States for Business

CNBC, Top States for Business

Corporation for Enterprise Development,

CFED Assets and Opportunities Scorecard

15 Variables:

Seven variables addressing tax rates, tax burdens, fiscal limits and tax law changes

Three labor-related variables, including right-to-work state

Debt service

Public employee workforce

Quality of state Legal system

Gross state product

Absolute domestic migration

Growth in non-farm payroll employment

45 variables grouped into these policy areas:

Government and fiscal policy

Security

Infrastructure

Human resources

Business incubation

Openness (i.e., export trade)

Environmental policy

Combination of the magazine's other key rankings, including:

Education climate

workforce training and availability

Labor costs

Infrastructure

Utility costs

Credit rating

Tax climate

CEO surveys grading states on:

Taxes and regulations

Quality of workforce

Living environment

55 measures grouped into these components:

Business costs

Economy

Infrastructure & transportation

Workforce

Quality of life

technology & innovation

Business friendliness

Education

Cost of living

Access to capital

68 outcomes grouped into the following categories:

Financial assets and income

Business and jobs

Housing and homeownership

Health care

Education

Rankings:

CT: 43

DE 30

Rankings:

CT: 46

DE: 26

Rankings:

CT: 33

DE: 17

Rankings:

CT: Unavailable

DE: Unavailable

Rankings:

CT: 45

DE: 27

Rankings:

CT: 45

DE: 31

Rankings:

CT: 29

DE: 22

Forbes, Best States for Business

Information Technology & Innovation Forum, The State New Economy Index: Benchmarking Transformation in the States

Site Selection Magazine, Top Ten 2012 State Business Climates

Small Business &

Entrepreneurship Council,

U.S. Business Policy Index

Tax Foundation,

State Business Tax Climate Index

U.S. Chamber of Commerce Foundation, Enterprising States: Getting Down to Small Business

 

35 data points grouped in these areas:

Business costs

Labor supply

Regulatory environment

Economic climate

Growth prospects

Quality of life

26 indicators divided into these categories:

Knowledge jobs

Globalization (i.e., exporting and foreign direct investments)

Economic dynamism (i.e., business start-ups)

Digital economy

Innovation capacity

50% of ranking based on corporate real estate executive assessment of states' business climates and

50% on tax burden index

46 indicators of “major government-imposed or government-related costs impacting small businesses and entrepreneurs,” including:

Taxes

Regulations

Health care

Energy

Labor

Crime

Public sector size

Transportation

Education reform

118 variables grouped in the following components:

Individual income tax

Sales tax

Corporate tax

Property tax

Unemployment insurance

33 variables grouped in the following areas:

Economic performance

Entrepreneurship and innovation

Business climate

Talent pipeline

Infrastructure

Rankings:

CT: 39

DE: 20

Rankings:

CT: 9

DE: 2

Rankings:

CT: Unavailable

DE: Unavailable

Rankings:

CT: 42

DE: 33

Rankings:

CT: 40

DE: 14

Rankings:

CT: 36

DE: 30