BusinessTN

Tennessee has long been known as a business-friendly state. Thanks to the lack of a personal income tax, the state’s comparatively low business tax rates and the natural advantages of Tennessee’s good location, the overall statewide business climate is hospitable for businesses of almost any size or type. While most of the state enjoys the benefits of a strong economy, some cities within Tennessee outperform the others in attracting new businesses and helping existing businesses prosper.

Once a business decides to relocate to Tennessee, or an entrepreneur begins a business in the Volunteer State, several questions arise: Where in the state should that business call home? Where can business owners find the most reasonable business tax rates? Which city has the fastest business growth? Who has the lowest business property taxes? Which community is most alluring for businesses, employees and consumers?

In sum, which city is the “Most Business-Friendly City” in Tennessee?

After carefully measuring and comparing Tennessee’s largest cities in each aspect of business-friendliness, the results are in: Spring Hill is the Most Business-Friendly City in Tennessee for 2007.

To select Tennessee’s Most Business-Friendly City, the Tennessee Center for Policy Research first determined what characteristics are most important for a city striving to encourage business success and protect the entrepreneurial spirit. Using data from the U.S. Census Bureau, the Tennessee Department of Education, the state comptroller of the Treasury and the Tennessee Bureau of Investigation, among other sources, the Tennessee Center for Policy Research compared Tennessee’s 50 largest cities in four categories that reflect the characteristics of a business-friendly city.

In this, the second annual version of the Tennessee Center for Policy Research’s ranking of the business climate in the state’s 50 largest cities, methodological improvements more accurately reflect measures of business-friendliness. As a result, a new category—Economic Vitality—has been added to reflect business and residential population trends. This new category replaces the Workforce Skill/Value category, which rewarded cities with a highly educated labor pool, such as Germantown, Farragut and Oak Ridge. Other categories feature minor modifications to methodology as well.

The outcome is a reduced focus on livability and employee base, and a renewed concentration on the question, “Where in Tennessee is it easiest to for a business to succeed at making money?”

Farragut, the Knox County town that earned the title of Tennessee’s Most Business-Friendly City in 2006, fell to twelfth in the 2007 overall rankings. While weaker marks in several Community Allure subcategories are partially to blame, Farragut’s drop is largely a result of this year’s focus on community growth trends and local business tax rates rather than an educated workforce and indicators of quality of life—measures at which Farragut excels.

Notable differences from last year’s ranking include Spring Hill, which traded places with Farragut, rising from 12th to best overall. Jackson fell 18 spots, while each of the Tri-Cities—Bristol, Johnson City and Kingsport—dropped more than 10 spots, largely based on slow business growth and high tax rates on gross receipts.

On the upswing were La Vergne, rising 15 spots to break into the top-five, and Portland, which shot from 32nd to 15th. Shelbyville jumped 20 spots and McMinnville, the biggest mover from last year, soared 25 spots higher.

Overall, three of the five most business-friendly cities from 2006 earned the same exact ranking as a year ago. Mt. Juliet held steady as the runner-up, Franklin remained third and Brentwood stayed put at fifth.

Spring Hill’s high overall score resulted from ranking first or second in three of the four categories considered in this report. In total, Spring Hill scored 93.98 out of a possible 100% on all counts of business friendliness. Mt. Juliet, which earned the second highest score at 80.5%, still finished a distant 13 points behind Spring Hill.

The title of Tennessee’s “Least Business-Friendly City” belongs to Lawrenceburg. The city’s rural location, comparatively high tax burden and unpromising growth trends led to scores in the bottom third in every category.

The disappointing business-friendly marks of Dyersburg, Chattanooga, Memphis and Jackson indicate that empty storefronts and increased unemployment rates are likely to be the norm rather than the exception in those cities in 2007.

Business Tax Burden
Every business in Tennessee is subject to two primary local taxes: the property tax and a tax on gross receipts of sales. The Business Tax Burden category counts for half of each city’s total business-friendly ranking. A city’s property tax rate makes up two-thirds of the Tax Burden score, and a combination of gross receipts taxes and business license fees comprise the remaining third.

The property tax is the most expensive local tax for nearly any business in Tennessee. While residential property is taxed on 25% of appraised property value, businesses pay taxes based on 40% of the value of their property. However, the tax rate placed on that 40% of property value differs widely from city to city. Variations in property tax rates across the state impact businesses that lease as well as those that own their property since the cost of the local property tax is passed on through rent.

Many of Tennessee’s most business-friendly cities are those with welcoming property tax rates, and no city in the state has a property tax rate more welcoming than Sevierville. At 1.65%, this Smoky Mountain tourist haven has the state’s lowest property tax for businesses. The owner of a $1 million business property in Sevierville owes only $6,600 each year in property taxes.

Taxes on that same $1 million property in Memphis, the city with the highest property tax rate, exceed $29,892. Memphis charges a tax of nearly 7.5% on appraised property value—a rate almost 25% higher than Germantown, the city with the second-highest property tax in the state.

Local governments in Tennessee also may tax gross receipts of sales. All counties charge the highest tax rate on gross receipts allowed by state law—roughly 15 cents for every $100 in gross receipts, depending on what goods or services a business sells. Cities then have the option of charging a city business tax—up to the state maximum rate again—on top of the county tax, which can double taxes for businesses. Of the 50 cities in the study, only six chose to spare businesses the maximum rate.

Columbia, which has the lowest business tax rate in the state, charges no city taxes on gross receipts. Spring Hill also collects no tax on gross receipts but applies a universal tax of $15 per business. Martin, Maryville and Soddy-Daisy each charge city taxes of half of the state maximum rate, and Franklin charges two-thirds of the maximum tax amount. All other cities charge businesses in their communities the highest tax rates allowed by law.

In addition to business taxes, Tennessee cities and counties collect a one-time business license fee. Those fees are generally $20 each for the city and the county—a combined $40 for every new business. The only exceptions are Farragut, whose business owners pay no city business licensing fees; cities in Shelby County with a $22 county fee; and Collierville, which charges the $22 Shelby County fee as well as a $25 city fee.

Spring Hill ranked best overall in the Business Tax Burden category for its low tax rates across the board. Columbia and Sevierville also scored well for their reasonable tax burdens. Memphis finished distant last with Germantown and Knoxville filling out the bottom of the ranking.

Economic Vitality
One of the most evident measures of the business friendliness of a city are its growth trends. If the population and the number of businesses are increasing in a city, it is a good indication that the area has a strong enough business climate to attract and support commerce.

It also indicates that the city is appealing enough to potential residents to provide businesses with a growing population of prospective employees and consumers. The Wilson County town of Mt. Juliet, with remarkable growth in both the number of businesses and residents, topped the ranking in the Economic Vitality category. Over the last five years, new business growth in Mt. Juliet has been nothing less than explosive—there are 60% more businesses in Mt. Juliet today than in 2002. Spring Hill has experienced a similar surge over the same time, with the number of businesses growing by more than 45% in the past half-decade.

On the other end of the Economic Vitality category are the Hamilton County cities of Red Bank and East Ridge, both of which experienced stagnant business growth in recent years. Red Bank has only one more business today than in had in 2002. Business growth in East Ridge failed to top three percent over the last five years.

Hamilton County’s slow business expansion in recent years is largely a result of an even larger problem for the county: The population is drying up. There are fewer people in Chattanooga, East Ridge and Red Bank today than in 2000. Unfortunately, with Hamilton County’s stifling business and residential tax rates, and poor scores in other categories, Chattanooga and its satellite cities seem destined to plummet towards the bottom of the business-friendly rankings.

While the news is bleak for Hamilton County cities in terms of population, Memphis, along with the Middle Tennessee cities of Murfreesboro, Franklin, Spring Hill and Clarksville have all grown by more than 9,000 residents since 2000.

Community Allure
The “Community Allure” category is a ranking of four distinct subcategories that reflect the livability and appeal of a city. These subcategories—Personal Tax Burden, Education Rating, Crime Rating and Cost of Living—ultimately affect business friendliness by impacting quality of life and the available pool of workers and consumers. Each of the four subcategories constitutes 25% of a city’s total Community Allure score.

Thanks to top marks in the Education subcategory and a top-five ranking in the Personal Tax Burden subcategory, Maryville ranked highest in Community Allure, followed by Spring Hill, Cookeville, Martin and Franklin. With scores of 50th out of the 50 cities ranked in the Education and Personal Tax Burden subcategories, Memphis finished a distant last, with Nashville, Goodlettsville, Jackson and Brownsville comprising the rest of the bottom five.

The Personal Tax Burden Rating measures how much an average Tennessee household pays in property, local option sales and wheel taxes by living in a given city. Sevierville was the city with the lowest tax rates for its residents, and Spring Hill and Mt. Juliet offered similarly reasonable tax obligations for their residents. The graduation rates and ACT scores of each city were ranked, and then averaged, in order to determine the Education Rating. Tullahoma and Spring Hill proved best at educating students in their public school system, while Goodlettsville, Nashville and Memphis performed poorly.

The Crime Rate category uses Tennessee Bureau of Investigation statistics about violent crimes to uncover which cities are the safest in the state. Last year’s Most Business-Friendly City, Farragut, scored as the state’s most crime-free locale, while Athens reported the most violent crimes per capita of any city in Tennessee. No cities offer their residents or their business communities a lower cost of living than the West Tennessee outposts of Union City and Dyersburg, which tied for first place in this subcategory. Not surprisingly, cities scoring poorly in the Cost of Living subcategory included the posh Nashville suburb of Brentwood, and Germantown, one of Memphis’ most exclusive bedroom communities.

Strategic Location
Location, location, location.

Just as location can determine the success of a business, it can also serve to determine how well-suited a city is to host successful businesses. Is a city close enough to an interstate for its businesses to draw a crowd? Can a town’s business owners catch a flight from a nearby airport to attend a conference or make a meeting with an important client?

Rural areas far from major airports and miles from the closest interstate naturally rank poorly. Remote Northwest and South Central Tennessee cities including Martin, Lawrenceburg, Dyersburg, McMinnville and Union City notched the lowest Strategic Location scores.

Memphis, Nashville and their suburban companions earned high marks in the Strategic Location category.

With easy access to world-class international airports and five major interstate highways between them, Nashville and Memphis area businesses have a much easier time attracting customers, visiting suppliers and accomplishing the necessary travel associated with commerce than businesses in other places in Tennessee.

Because of fewer departures and direct flights, Strategic Location scores are lower for cities relying on regional airports such as the Chattanooga Metropolitan Airport, Tri-City Regional Airport or McKellar-Sipes Regional Airport in Jackson as primary conduits for their residents’ air travel.

Conclusion
For Spring Hill, Mt Juliet, Franklin and other cities with high marks for business-friendliness, these rankings reflect responsible governance, careful planning and an open line of communication between policymakers, residents and the business community to create reasonable tax rates, good schools, low crime and a thriving economy. These cities are not only rewarded by high marks in this report, but more importantly by thriving economies and low unemployment rates.

The thirteen highest scoring cities overall share one important factor; they are all suburbs of either Nashville or Knoxville. These cities, with their comparatively lower taxes, better schools and lower crime rates benefit from amenities and conveniences provided by being so close to a major metropolitan area.

Comparing the “big four” to their suburbs, or even self-supporting mid-sized cities like Jackson, Clarksville or the Tri-Cities is unfair to all 50 cities in this report. In some ways, it may be more reasonable to compare the “big four” with one another based on how well their satellite cities succeed in providing business-friendly environments. The cliché that the fish rots from the head down seems applicable given the recent economic struggles of Memphis and Chattanooga. While many Nashville and Knoxville suburbs rank in the top half of business-friendly cities, five of the eight least business-friendly cities are Memphis and Chattanooga themselves and three of their suburbs.

The silver lining for Memphis, Chattanooga and other cities that received low marks for their unwelcoming business climates is that, despite differences with cities like Spring Hill, Mt. Juliet and Franklin, they can learn from the successes of business-friendly cities.

The state’s most business-friendly cities have generated a welcoming business climate through years of wise and frugal tax and budgetary policy and tireless efforts to reduce stifling regulatory burdens that create difficult environments for business success. Policymakers working to make their cities more business-friendly should emulate the example of communities like Spring Hill by lowering tax rates, cutting red tape and taking innovative approaches to address issues like education and crime within their communities.

For the time being, the future certainly looks bright for Spring Hill. With low taxes on businesses, property and individuals, a strong school system and a thriving local economy, the Middle Tennessee city best known for its Saturn automobile plant is well on its way to becoming a full-fledged economic hub for the state.

The Business-Friendly Formula
Business Tax Burden (40%, overall score): Business property tax rate (2/3rds) & City and county annual gross receipts tax based on $1 million in gross receipts, plus city and county initial business licensing fee (1/3rd)

Strategic Location (20%): Distance from nearest interstate (1/2) & distance from nearest commercial airport, indexed by airport based on number of flights (1/2)

Economic Vitality (20%): Residential population growth/decline since 2000 (1/2) & growth/decline in the number of businesses since 2002 (1/2)

Community Allure (20%): Cost of living (1/4th) & violent crimes per capita (1/4th) & personal tax burden rating measured by property, local option sales and wheel taxes paid by average household (1/4th) & average ACT scores of high school students (1/8th) & high school graduation rates (1/8th)