Nobody -- except maybe a politician in an election year -- disputes the fact that it is the millions of producers and consumers who interact on a continuous basis that really determine the strength and vitality of a regional economy. In a sense, politicians are similar to spectators at an athletic event, cheering on the home team, using the word "we" when their team wins, "they" when it loses.

Similar, but not identical.

Politicians, both on the legislative and the executive side, obviously don't drive an economy. They do, however, help establish the general conditions under which the economy operates.

Can they manufacture widgets? No, but they can establish tax policy to make it impossible for someone else to manufacture widgets. Do they create jobs? No, but they can pass laws and establish regulations that make it pretty difficult, or at least a lot more expensive, for anyone else to provide jobs, either.

Likewise, legislators can make those tasks easier, too.

Behind all the hot air and platitudes, serious work is being done by these folks that will, at least in a macro sense, make doing business in one state more (or less) advantageous than in a neighboring state.

In other words, they help to create the climate in which local and regional businesses operate. How well they do that will have a direct impact on your bottom line. And if you're in the mode of deciding between several states where to place your next plant expansion, this is the type of information you should be looking at closely.

For the past four years, Expansion Management Magazine has examined the business climates created by the 50 state legislatures around the country. And we try to be focused in our examination, looking only at those things a legislature actually does, or at least has control over. Things such as tax rates, government borrowing, restrictive labor laws -- those sorts of things.

We all know that states need money to operate and they have to get that money from someplace. The LQ looks at where/from/whom a state gets its revenues, what it spends that money on, and whether that state is living within its means (or increasing its debt and saddling new business with debts incurred before that company even expanded or relocated to that state). Extra credit is given for states that have shown improvements in these areas over the past five years.

This year's winners

One of the characteristics of the top five states is that, with the exception of Alabama, none of them taxes income, either corporate or individual. With the exception of Washington, all have "right to work" laws. And, not surprisingly, all have robust economies.

Governments obviously need money to operate. Roads, schools, police and fire protection all cost money, and governments get that money through taxes.

What's important to a business is the types of taxes that provide the bulk of the funding for states in which they operate, or may soon operate as a result of a business expansion or relocation.

If a state relies heavily on, say, corporate income taxes and your business is especially "vulnerable" to that tax, a state with no corporate tax is obviously a plus. Conversely, if you're not showing a profit after your accountant works her magic, even a high corporate tax rate might be irrelevant to your decision to locate in a state.

If you're operating a large distribution facility, or normally maintain a high volume of inventory, you may be able to live with a high corporate income tax rate, as long as the state has no inventory tax.

It's important to go through this same exercise with every form of tax your company is susceptible to. Sales taxes. Severance taxes. Inventory taxes. Even personal income taxes.

The average state receives 2.66 percent of its revenue from corporate income taxes, and 12.99 percent from individual income taxes. The average state tax revenue per capita is $1,659.

It's also important to look at how states spend the money that they collect in taxes. Are they spending enough on infrastructure -- things such as highways -- or are they trying to save money in that area? Infrastucture is a tempting place to occasionally defer spending but, as you know in your own business, the cumulative effect can be severe long-term problems that will require significant expenditures in the future. This time, however, your company is located within that state and paying taxes.

The average state spends 8.25 percent of its budget on highways.

Another area to examine closely is the level of expenditures on education, the largest single expense in most states.

Spending enough money on education has a major impact on the quality of workers you are likely to encounter in a state. Like highway and other infrastructure spending, scrimping on spending in this area will likely have an incrementally large impact on the future. The average state spends 31.67 percent of its budget on education.

But spending alone is not the answer to education. It's how well the schools perform with the resources they are given that really counts. (For our rating of 1,000 school districts nationwide, see our Education Quotient '98 beginning on page 8.)

Are things improving?
The hallmark of politics is change and legislatures are the bodies that effect that change. Trends are important. Compare tax rates from five years ago with those of today. Have they gone up or down? If they're going up, is the tax burden shifting toward or away from business? If it's shifting away, where are the taxes coming from? Eighteen states have reduced their reliance on corporate income taxes and 27 have reduced their reliance on individual income taxes.

Is the per capita debt going up or down? Is the state government living within its means, or is it running up debt for businesses and individuals to pay in the future? Thirty-seven states have lowered their per capita debt over the past five years, led by Alaska, Delaware and South Dakota.

How much are they spending on themselves? The average percentage of state budgets that goes toward government administration is 3.62 percent. Twenty-eight states spend less than that.

Twenty-one states have right to work laws that make it illegal for companies to require union membership as a condition of employment.

These are just some of the areas you should check out in your site search as you size up a state's business climate. Although by no means comprehensive, it should get you pointed in the right direction.

For the Special 1998 Ratings Issue contact knichols@newhope.com.