Tax Rates Aren't What Small Business Owners Say They Really Care About

Instead, they care more about how easy it is to keep up with rules, regulations, and tax filings. 

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Claudio Divizia/Shutterstock.com

While low taxes are seen as the silver bullet of economic development for many in the small business and conservative communities, a new report finds that tax rates are not the most important factor in determining how entrepreneurs perceive the business friendliness of their state. In fact, small business owners say that the two most important factors in how friendly state and local governments are to business are ease of professional licensing and ease of filing taxes—not how much they end up paying in those taxes.

These are the results of the third annual survey of 12,000 small business owners from Thumbtack, an internet marketplace for local businesses, and the Ewing Marion Kauffman Foundation, released earlier this month. The survey tracked responses to questions about the role of government and government policies—such as taxes, licensing, and training programs—across 38 states and 82 metro areas.

For the third year in a row, small business owners in Utah, Idaho, and Texas named their states as among the most small-business friendly in the country. Virginia and Louisiana also ranked highly for overall small business friendliness. At the other extreme, California, Rhode Island, and Illinois were given Fs, while Connecticut and New Jersey were graded as Ds. In general, these highs and lows tend to map onto the political powers in each part of the country—the map shows less friendly business climates in Democratic strongholds along the Northeast corridor, the Frostbelt, and the West Coast, while the top-rated states were largely Republican-leaning states in the Great Plains. Check out the full ranking in the map below, from the report. (For a full interactive, see the Thumbtack website).

Thumbtack

The top-ranked metro areas were Colorado Springs, Boise, and Houston, while the lowest-ranked were Sacramento, Providence, and Buffalo (see more data in the map below, and check out the full interactive on Thumbtack’s site).

Thumbtack

Across the country, two-thirds of these business owners responded that they felt they paid their “fair share” of taxes, not too much or too little. What mattered more for their success, they said, had far more to do with the ease of getting their business started and keeping it going, particularly in terms of the regulatory hurdles. The report found that two factors—the friendliness of licensing forms and fees, and the friendliness of the tax code and regulations—to be most closely correlated with overall perceptions of business friendliness.

The report also found awareness of training programs—the very kind that could help proprietors understand how to jump through these regulatory hoops—to have a significant effect on business owners’ perceptions of government friendliness. 

Awareness of training programs raised state “business friendliness” scores by nearly 10 percent. Seventy-six percent of those owners who were aware of training programs responded that their government was “somewhat” or “very supportive” of small businesses. 

The report also gauged small businesses’ attitudes toward the Affordable Care Act. Predictably, it found that many small business owners said they believed that the implementation of the Affordable Care Act was making it harder for them to make ends meet. Half of all respondents said obtaining and keeping health insurance for their businesses was “somewhat” or “very” difficult. Some complained about the high costs, others about the effects that the Affordable Care Act had on driving up the prices of their old small business insurance plans.

This is not the first piece of evidence that points to how much politicians overstate the significance of tax rates on small business formation. Earlier this year, I wrote about a report from Endeavor Insight, in which entrepreneurs named access to talent as far more important than tax rates in determining where to start their businesses. For owners of the small businesses in this latest study, it again wasn’t about how much they paid; far more important was how much the hassle of meeting these requirements interfered with the jobs they really wanted to do.  

Top Image: Claudio Divizia/Shutterstock.com

About the Author

  • Richard Florida is Co-founder and Editor at Large of CityLab.com and Senior Editor at The Atlantic. He is director of the Martin Prosperity Institute at the University of Toronto and Global Research Professor at NYU. More
    Florida is author of The Rise of the Creative ClassWho's Your City?, and The Great Reset. He's also the founder of the Creative Class Group, and a list of his current clients can be found here