WalletHub, a personal finance website, recently released its annual list of the best and worst states to start a business in the U.S. Pennsylvania ranked 45th on the list.
Are you surprised? I’m not.
I love this place. I’ve run a business here since 1994 and couldn’t be happier. I have driven countless times between Philly and Pittsburgh to visit my son at Pitt (a great state university), so believe me when I say that Pennsylvania is a huge and beautiful state with a rich history and plenty of great places to visit. Philadelphia is a super livable city with great food, sports teams, culture and people. OK, not the sports teams. But our location near the mountains, beaches and other major cities makes our area a perfect place to run a business and raise a family.
So why in the world would those jerks at WalletHub rate our state so poorly? OK, they’re not jerks. They’re just reporting the data. And the data doesn’t lie. It tells us that we were ranked among the lowest (42nd) for startups per capita, five-year business survival rate (44th), and number of entrepreneurs per capita (49th). Sure, businesses in our state adopt technology well and Pennsylvania has a high availability of workers and great higher education. But overall it’s not enough — entrepreneurs just don’t like us.
So … why? Why is Pa. such a lousy state to start a business? Why is North Dakota No. 1? Why do states like Florida rank so high? Have you ever been to Florida? It’s one big boulevard of fast-food restaurants and retirement communities. We can all debate this, but to me, there’s one glaring reason: taxes.
24/7 Wall Street, a financial publisher, summed it up in a report from 2015:
“Pennsylvania, which has a long-term plan to raise taxes to repair its transportation infrastructure, levies a tax of 41.8 cents per gallon of gasoline, the fifth highest rate in the nation. Residents with the lowest 20% of incomes paid 5.8% of their incomes on sales and excise taxes like these, versus the comparable rate of 0.6% for the state’s wealthiest residents. Similarly, while property taxes tend to be levied more proportionately across the nation, Pennsylvania’s poorest households paid nearly 4% of their income on their homes, while the wealthiest 1% paid just 1.6%. This was a relatively large gap compared to other states.”
Yeah, it’s taxes — income, sales, fuel, sin, wireless, travel. Pennsylvania has one of the highest levels of taxes in the country. In fact, when 24/7 Wall Street ranked the least-friendly tax states in the U.S., Pennsylvania came in at number six. Also included amongst the worst top 10 are Indiana, Kansas and Arizona. Kiplinger, another financial publisher, ranks Hawaii, Connecticut, New York and New Jersey amongst its worst states for taxes (Pennsylvania is “mixed”).
These are states with high tax burdens. Want to guess where they rank on WalletHub’s best states for startups list? Yup … near the bottom. New Jersey, by the way, came in dead last. Of course, there are some inconsistencies here. For example, California is ranked the 15th best state for startups even though it has a very unfriendly tax environment, according to Kiplinger. But they drink a lot of wine there, so I’m willing to give them a pass. Oh yeah, there’s that Silicon Valley thing too. Regardless, and for the most part, you can conclude that the worse a tax environment is in a state, the less appealing it is for an entrepreneur to start a business there.
This should come as no surprise. The successful business owners I know, and particularly the entrepreneurs who start their own companies, are hard-working, dedicated, smart people. And they all, without exception, are numbers-oriented. You have to be. Running a business profitably requires keeping a close eye on expenses and maintaining a low overhead. Pennsylvania offers great communities, a healthy lifestyle, strong education and access to capital. But in this age of fast internet and easy travel, we’re competing against other states that offer similar benefits — and a lower, more inviting cost environment.
So is it any wonder that those states are a better place to start a new business? Not to me. If Pennsylvania — and Philadelphia — truly wants to be a place that attracts startups and builds a stronger economic base, then it also has to be the place where those businesses (and mine) aren’t nickel and dimed by Harrisburg and City Hall to meet its ever-growing costs for healthcare, retirement and other entitlements. Otherwise, like our sports teams, we’ll just continue to muddle along at the bottom of the pack.
Gene Marks, CPA, runs a ten-person technology consulting firm in Bala Cynwyd. He writes daily for the Washington Post and weekly for Forbes, Inc. Magazine, Entrepreneur Magazine, and the Huffington Post.