Red states, blue states: The politics of top states for business

George Kavallines | CNBC

George Kavallines | CNBC

Step back and look at the picture of competitiveness we have painted in our nine years ranking America’s Top States for Business in our 10 categories of competitiveness, and you will notice a decidedly red hue.

States with Republican governors have dominated our rankings over the years, with Republican governors landing in the top five 30 times, compared to 16 for Democrats. (There is an extra top-five finish for the GOP because of a tie for fifth place between Republican-led Virginia and Utah in 2013). Many readers and viewers—and the Republican Governors Association (RGA)—have been quick to seize upon the statistics.

“Republican governors are cutting taxes, slashing spending, balancing budgets and transforming their states into engines of economic growth,” the RGA declared after a second consecutive GOP sweep of the top five last year.

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But in 2015, a little more blue is creeping into the picture.

For only the third time since our study began in 2007, a state with a Democrat as governor—Minnesota under Mark Dayton—has captured the top spot in our rankings. The other two times were back in 2007 and 2009, when Virginia took first place under Gov. Timothy Kaine, who is now a U.S. Senator.

And that’s not all. Colorado, led by Democratic Gov. John Hickenlooper, finishes fourth this year, giving Democrats their best showing in our top five since 2010, when they took four of the top five spots.

So is the competitive landscape shifting? Yes and no.

Helen H. Richardson | The Denver Post | Getty Images Pot smokers partake in smoking marijuana at exactly 4:20 during the annual 420 celebration in Lincoln Park near the State Capitol in Denver, Colorado, on April 20, 2015.

Helen H. Richardson | The Denver Post | Getty Images
Pot smokers partake in smoking marijuana at exactly 4:20 during the annual 420 celebration in Lincoln Park near the State Capitol in Denver, Colorado, on April 20, 2015.

From the time we started ranking the states in 2007 and through last year, low costs—including low taxes—have been the primary battleground in the war between the states for business. Nearly every state—red and blue—made low business costs a centerpiece of its marketing efforts, so we gave Cost of Doing Business the heaviest weight among our categories. Because cutting taxes is a bedrock Republican priority, GOP-led states have had an edge, particularly after the party’s electoral sweep in 2010.

But in 2015 there is a change. With employers increasingly complaining about a “skills gap”—a lack of qualified workers to fill skilled positions—states are touting their workforces like never before. As a result, under our methodology, Workforce carries the most weight in this year’s rankings. This plays more to Democrats’ priorities, such as education and workforce training.

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In the general scheme of things, it is a relatively subtle shift. Workforce and Cost of Doing Business are just two categories out of 10 in our study, and the change in weighting only affects 200 out of 2,500 total points. But it is enough to allow two relatively high-cost states—Minnesota is the 16th most expensive state for business, and Colorado is the 15th—to slip into our top five this year.

Taxing issues

Indeed, Minnesota captures the top spot just two years after approving a huge, $2 billion tax increase that Republicans warned would cause businesses to flee in droves. So far, that has not happened. Meanwhile, Minnesota’s other strengths—including its second-place finish in Education, third place in Quality of Life and fifth place in Economy—are more than enough to outweigh the state’s cost problems this year. In the Workforce category, Minnesota suffers a bit because of its strong union presence and lack of a so-called right-to-work law barring compulsory union dues. But the state still manages a respectable 13th place in the category, making it the first non-right-to-work state to top our rankings.

Also helping the Democrats is the growing call by U.S. corporations for inclusiveness, which we consider in our Quality of Life category. Of the 21 states with nondiscrimination laws covering lesbian, gay, bisexual and/or transgender residents, Democrats control 12 and Republicans just 9. Of the 29 states without such protections—thereby losing points—22 are Republican-controlled.

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But before Democrats celebrate some sort of sea change in the battle for business, take note: The tried-and-true Republican strategy of low taxes and friendly regulation is still working, too. For proof, look no further than Texas.

The Lone Star State—a red state if ever there was one—has never finished below second place in our rankings. Not only is this year no exception, Texas misses first place by just four points. Its performance is especially impressive considering a roughly 40 percent drop in energy prices that many warned would plunge the state into a recession. At least for now, the Texas economy remains solid. In part, that’s because the state has been trying to diversify beyond energy since the last oil shock in the ’80s. The success of that effort has been limited—the state still relies on oil and gas taxes for around 8 percent of its revenue. More important, analysts say, the state was socking away money in its reserves when prices were high.

Texas’ disadvantages, primarily in Quality of Life and Education, pale in comparison to its overwhelming strength in categories such as Economy and Infrastructure. Texas boasts two of the nation’s busiest airports, a vital seaport and an extensive rail network.

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True to red-state form, Texas prides itself on its low taxes—no corporate or individual income tax, and just a 1 percent business franchise tax. The state’s Cost of Doing Business ranking, at No.21, suffers somewhat because of high property taxes, office rents and wages. Nonetheless, the right-leaning Tax Foundation ranks the Texas business tax climate the 10th most competitive in the nation. Minnesota’s comes in 47th.

Ed Lallo | Getty Images

Ed Lallo | Getty Images

And while Minnesota wins points this year for its vastly improved state finances—the state has gone from a $6 billion budget shortfall when Gov. Dayton took office in 2011 to a $2 billion surplus going into this fiscal year, thanks in part to that tax increase—our study finds that the most creditworthy states are overwhelmingly run by Republicans. Of the 15 states with AAA credit ratings, according to Moody’s Investor Services, 10 have Republican governors. They include three of our top five—Texas, Utah and Georgia. Democrats control four states—Delaware, Missouri, Vermont and Virginia; while one state—Alaska—is run by an Independent. The three states that are so flush they don’t need to issue general obligation debt—Nebraska, South Dakota and Wyoming—are also under GOP control.

To be fair, Republicans control the majority of statehouses—31—to be exact, giving them a built-in edge. And red-state balance sheets are not universally pristine. New Jersey‘s credit rating has plummeted to A2—Moody’s second-lowest rating—after nine downgrades under Gov. Chris Christie. And the agency says the outlook for the state is negative. That gives New Jersey the second worst rating in the nation.

The worst, Illinois, which recently switched from Democratic to Republican control, has an A3 rating with a negative outlook, thanks to a full-blown crisis over its public pension plans. Gov. Bruce Rauner, a former private equity executive, took office this year looking at more than $100 billion in unfunded pension liabilities and no clear way out of a hole dug during years of mismanagement by both Democratic and Republican administrations.

We design our Top States study, measuring 10 different categories of competitiveness, to reflect the realities of the battle for business: There is more than one way to win. This year’s results prove that, once and for all. And this time around, neither party comes away with a talking point.

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