How Business-Friendly is Kentucky?

EXPERT COMMENTARY

How Business-Friendly is Kentucky?

By Maurice P. McTigue |
Jul 21, 2013

If the various rankings that measure “business friendliness” across the country are any indication, Kentucky is stuck in the economic doldrums. In the most recent edition of CNBC’s “America’s Top States for Business,” released earlier this month, the Bluegrass State comes in at No. 36 for the second year in a row. In fact, for the last five years Kentucky placed in the bottom half of most state economic and business rankings.

Meanwhile some smaller states are steadily climbing. South Dakota currently holds CNBC’s top spot and consistently places highly on similar lists. North Dakota, Nebraska, Wyoming, and Idaho are also in the top 10.

So do these rankings actually matter? In a word, yes: What many of them really measure is which states are most likely to attract local and out-of-state investment dollars. Investment dollars lead to economic growth, and a growing economy creates new, high-quality jobs.

Any real increase in long-term prosperity will not occur without these new jobs.

Focusing on investment first favors more than just the rich. Consider, for example, what it takes to grow a small business such as a sole-proprietor bookstore. The owner may believe she can sell more books by hiring a new employee, but before that happens, she might have to put in more counter space, buy another cash register, put in more bookshelves, and of course stock those shelves with more books. Most businesses, whether they are large or small, have to commit to some level of investment before a new hire will be profitable for them.

Many cities and states respond to a lack of investment by getting out the taxpayers’ checkbook and attempting to lure companies through subsidies, special tax breaks, or other inducements.

But it’s wiser to figure out what’s preventing any business — big, small, local or out-of-state — from investing in Kentucky and addressing that instead. In some cases it’s as simple as improving bureaucratic processes.

In a 2013 small-business friendliness survey by Thumbtack.com, which focuses heavily on firms with fewer than 10 employees, Kentucky ranks 39th for its tax code, 36th for licensing regulations and 34th for training and networking programs. None of these issues requires any significant expenditure of state money to correct — they are, after all, things the government is already doing. Policymakers only need to concentrate on doing them in a more business-friendly way.

Several top-ranked states use a relatively simple tactic — forming a government streamlining commission — to draw on private-sector expertise and develop options for government reform and restructuring. These commissions can serve a number of purposes, such as identifying waste, inefficiency and other policies that unnecessarily get in the way of business activity — or they can focus on broader goals like improving a state’s overall economic competitiveness. Including experts from the private sector is essential, as they’re best able to identify barriers to investment or policies that create too much uncertainty for businesses to make permanent plans and decisions.

Virginia’s Commission on Government Reform and Restructuring has used the input of business leaders to maintain the state’s status as one of the nation’s most competitive. And a similar commission in Louisiana — with the cooperation of Gov. Bobby Jindal and the state legislature — helped facilitate the state’s climb from 46th to 11th in Chief Executive magazine’s “Best and Worst States for Business” rankings in only five years. During that period Kentucky fell from 26th to 29th.

My challenge to Kentucky is to commit to becoming a top-10 state — and then do all the things that are necessary to get there. State and local policymakers should ask a simple question before making any economic decision: Will this help us attract investment and eventually growth, jobs and across-the-board prosperity? The most successful states develop a culture of competitiveness and work hard to maintain it. And if South Dakota and Louisiana can do it, so can Kentucky.

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