The Worst States For Business, November 24, 2008

Three first-term governors fight problems that have plagued their states for decades.

The economy is diving deeper into a recession seemingly by the day, forcing tough decisions on companies: Layoffs? Plant closings? Killing product lines?

They’re also reassessing the business climate of the states where they operate. Does the regulatory environment meet its needs? Are business costs reasonable? What are the growth prospects in the area?

In Pictures: The 10 Worst States For Business

For the past three summers, Forbes has ranked the best states for business and featured states with attractive business climates. Virginia’s on top, with Utah and North Carolina right nearby.

Now we look at the other end of the scale. The three states at the bottom are all led by first-term governors trying to overcome problems that have plagued their states for decades. Each of them has been actively introducing solutions to help improve their business climates.

West Virginia has ranked 50th in back-to-back years, hindered by a labor supply where only 16% of residents have a college education, worst in the country. The business tax burden is also a problem, 17% above the national average, according to economic research firm Moody’s That ranks 48th in the U.S.

Governor Joe Manchin III disputes the idea that West Virginia is not an attractive spot for businesses, citing the $8 billion in investments in the state from companies like Hino Motors since he took office in 2005. “It’s a new West Virginia,” he boasts. He points to the privatization of the workers comp system, which has reduced costs by 27% for West Virginia employers. The state plans to gradually reduce the corporate income tax to 6.5% by 2014 from 9% last year. These two things should improve West Virginia’s poor tax standing.

As for education, Manchin created a “Bucks for Brains” program in 2008 with a $50 million research endowment split between Marshall University and the University of West Virginia. The program is designed to stimulate research and development and eventually lead to jobs in emerging high-tech, high-wage jobs. West Virginians like what they’ve seen so far from Manchin. He was overwhelmingly reelected this month to a second term by an almost three-to-one margin over his Republican opponent.

We compiled our ranking of states by looking at 32 data items across six broad categories. The main areas of focus included business costs, labor supply, regulatory environment, current economic climate, growth prospects and quality of life.

Louisiana ranks as the second worst state for business. It has been ranked in the bottom two each year in our Best States list. Louisiana is still reeling from the devastating effects of Hurricanes Katrina and Rita, but it also struggles with two major problems that existed long before the storms: an uneducated labor force and an unhealthy reputation for corruption.

Louisiana boasts a high-school graduation rate of only 80%; only Texas has a lower rate. This is a long-term problem that Governor Bobby Jindal, who took office in January, will need to address. In the meantime, Jindal, a rising star in the Republican Party, has made rooting out corruption in Louisiana one of his chief priorities.

“We adopted comprehensive governmental ethics reforms that have made Louisiana a national leader in accountability and transparency,” says Stephen Moret, head of the Louisiana Department of Economic Development. Moret also cites the elimination of several unconventional business taxes and the adoption of the largest personal-income tax cut in state history as ways that the state has improved its economic competitiveness.

Louisiana and West Virginia both feature low labor costs, 11% and 7% below the national average, but that is not enough. “These states are lower cost areas, but their labor forces are not competitive and therefore are not going to attract venture capital money or big outside investments,” says Mark Zandi, chief economist at

Both states rank in the bottom 10 for attracting venture capital over the past three years, according to PricewaterhouseCoopers and the National Venture Capital Association. The state bringing up the rear when it comes to VC money is our 48th ranked state: Alaska, led by another rising star of the Republican Party serving a first term as governor.

Alaska fares poorly on our ranking on the basis of numerous factors. Energy costs are 50% higher than the national average. Unemployment has been the second highest in the country at 6.9% over the past five years. The state economy has been growing at an anemic 1.1% a year over the past five years, second worst in the U.S.

The state is the second worst in the nation when it comes to incentive programs for businesses. according to a study done by Pollina Corporate Real Estate. The author of the study, Brent Pollina, laments Alaska’s “passive economic development approach,” and says the economic development office has not been very aggressive selling the Alaska brand.

And of course the cold weather and remote location stand as significant deterrents to a strong business climate. Alaska was the only state that did not finish in the top 20 in at least one of our six main categories.

One of the people looking to solve Alaska’s major problem of high energy costs is Steve Haagenson, who Gov. Sarah Palin appointed as Energy Coordinator for the state earlier this year. Haagenson has been looking at how energy is being used across the state and what things are available in each community whether it is solar, hydro, oil, gas or other resources. “We want local communities to utilize the resources they have,” he says. He calls it a one- to 10-year plan, and the full report is expected to be released next month.

Alaska’s unemployment rate is high, in large part due to significantly higher seasonal employment than any other state, according to Dan Robinson, an economist with the Alaska Department of Labor and Workforce Development. Still Robinson admits, “Rural Alaska is not doing so great.”

State agencies have implemented dozens of programs to help create jobs in Alaska. There are plans that target youth, seniors, veterans (Alaska has the highest per capita percentage of any state) and others. Alaska might be known as a boom and bust economy, but even with high unemployment 2008 will be the 21st year of adding jobs to the economy.

Alaska did stand out in a couple areas that we examined. Its high-school attainment rate is 92%, the second best in the country. The Last Frontier also ranked second best in a study on tort costs and tort laws done by the Pacific Research Institute, a California think tank.

Every state must deal with major problems that can sometimes take decades to tackle. Economist Zandi offers a familiar refrain on how to improve some of these states hindered with weak business climates: Invest in education. But it comes with a twist. He thinks states with smaller economies like Mississippi and West Virginia should not be investing more heavily in K-12 education because when kids get a good early education they tend to leave the state and the state economy does not benefit. “You get a much bigger bang for the buck if you invest in trade schools, community colleges and public universities,” he says.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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