State business climate rankings are popular and can be influential in policymaking. Past academic studies have criticized those rankings for being based on some subjective criteria and on state-level data.
This paper proposes, first, that a business climate is an individual perception, and second, that a business climate is a case-specific condition depending on industries and stages of firm development.
Thus, it is critical to measure the business climate at the decentralized, individual level.
We employ a newly released survey of over 3,600 small business owners and conduct hierarchical models to control both individual and state variables, and to examine within and between state covariates.
Regression results demonstrate that most state rankings are null even for individual perception of business climate, and in fact some rankings are negatively associated.
Moreover, contrary to the conventional understanding, personal income, corporate income, and sales taxes are not reflected in the perception, but property taxes are.
These findings suggest a need for fundamental reconsideration of how policymakers use business climate rankings.