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June 2012
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WORK TO DO Entrepreneurship ranking seems a tad optimistic

There is a plethora of rankings out there these days: best colleges, best retirement cities, best states for business. Some are meaningful. Some are agenda driven. Some are just for fun. They are always interesting, but almost universally flawed.

Kentucky officials are crowing about the Commonwealth's remarkable one-year jump from 49th place to fourth in the University of Nebraska-Lincoln's State Entrepreneurship Index.

The index purports to measure five things: net growth in business establishments, per capita growth in business establishments, business formation rate, number of patents per thousand residents and average income for non-farm proprietors.

While we don't doubt that Kentucky is making efforts on all of these fronts, we also have to ask what, really, has changed in Kentucky over the past year that would give rise to such a move. And the answer is, not much. There has not been major tax reform, or a surge in state GDP, or a massive state investment in business development over the past year. Unemployment remained at 7.4 percent in July, unchanged from June and more than a full percent above the national average. One would expect a boom in new businesses to impact that number.

We think most researchers looking at Kentucky's leap would suggest either a flaw in last year's base data or a flaw in the measure itself. For instance if a state starts from a very low base - say it has just one new business and in the next year it adds one - that's 100 percent growth. Failure to properly weigh that can give rise to the sorts of jumps Kentucky posted and that may well be what happened.

Not to be curmudgeons, but we think Kentucky has a long way to go before it truly becomes a top business incubator. CNBC's annual ranking of top states for business is we think a more realistic measure. It ranks Kentucky 39th overall, which is probably closer to reality. Specifically, the CNBC survey ranks Kentucky 14th in the cost of doing business. But it ranks its overall economy 46th. The state ranks 29th in infrastructure, 29th in workforce and 42nd in quality of life. Kentucky is 37th in technology and innovation, 36th in business friendliness and 35th in education. It is number one in cost of living (about that the survey says this: "The Bluegrass State offers America's lowest cost of living, but largely as a result of a state economy that has suffered badly from the decline of the coal industry). And significantly, Kentucky ranks 47th in access to capital.

That last indicator flies in the face of any argument that the state is fertile ground for entrepreneurship. It is hard to start new ventures in a state that is starved for capital investment.

Kentucky also has a corporate tax structure - passed in a Republican administration of all things - that imposes a minimum tax on pass-through entities that include the LLCs and S corporations that make up almost all new small businesses. There is a $175 flat tax plus a gross receipts tax that hits companies with more than $3 million in revenue whether they are profitable or not.

The state we'll grant does have good programs such as the Kentucky Innovation Network that assists small and new businesses through local offices that include Murray State University and West Kentucky Community and Technical College.

But simply put, if Kentucky wants to truly be a hotbed of entrepreneurship and new business, it's going to take more than flawed rankings. It's going to take policy changes in the areas of taxation, regulation, and capital investment incentives. The state has taken a few steps in the right direction, but there's still a lot of work to do.

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