Which states love small business?

Attention libertarians! Find out where the cold, dead hand of the state weighs lightest.

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By Renuka Rayasam, FSB reporter

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Washington, D.C. -- Entrepreneurs, zip up your parkas and head for the plains! South Dakota once again leads the list of U.S. states with the best tax and regulatory climate for small business, according to the Small Business and Entrepreneurship Council's latest ranking.

Rounding out the top three were Nevada and Wyoming, unchanged from last year. The rest of the top 10 includes Washington, Florida, Michigan, Texas, South Carolina, Virginia and Alabama.

The nation's capital came in dead last once again, preceeded by California and New Jersey.

Last year's index used 29 factors to rank states with the lowest taxes and lightest regulatory burden. This year's list added two new criteria: corporate capital gains tax rates and transportation infrastructure.

"As the index changes we get a clearer picture of which states are better for small business," says SBE chief economist Ray Keating.

The top and bottom ten both include a mix of small and large states spread across regions. Rankings are determined by specific policies at the state level. For example, Rust Belt neighbors Ohio and Michigan moved in different directions this year.

Ohio climbed from 38th to 29th on the list after passing a broad tax-relief package, while sixth-place Michigan will likely slide in next year's rankings because it adopted income and sales tax increases after the SBE Council finalized its list.

"Even top states can make bad decisions," Keating adds.

But do low taxes and limited regulation really equate to a better climate for small business? The SBE Council's index does not address issues such as access to venture capital and a pool of educated, skilled workers, both areas in which California (#49 on the list) and New York (#46) have a clear advantage over South Dakota and Nevada.

And many of the tax rates that the SBE index measures, such as estate taxes, have little impact on small-business owners because they only affect the wealthiest taxpayers. "Most small businesses want low taxes for the lower and medium income group," says John Arensmeyer, head of Small Business Majority, a California-based advocacy group.

According to Arensmayer, lower tax rates on the topmost bracket benefit only 2% of U.S. small-business owners, who earn an average of $77,000 a year.

All that said, the SBE Council's report notes that states in the top half of this year's index registered double the population growth of states in the bottom half. And the rate of job creation was 70% faster in the top 25 states versus the bottom 26.

South Dakota may be on to something.  To top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.