The Best and Potential States for Startups: A Policy-First Look at Who’s Helping Founders

If you ask most people which states are best for startups, they’ll rattle off California and New York because that’s where the money has historically pooled, understandably now too, Texas. That’s a bit like saying Las Vegas is a great place to build wealth because rich people go there. The concentration of capital in a place doesn’t tell you whether that place is structurally designed to let you keep what you build; in fact, I just published a popular set of steps every ecosystem needs to take, particularly those without much wealth and with few resources available (take a look here). Let’s talk about startup ecosystem development policy…

100,000 people are arriving in Austin, Texas this week, for SXSW, and with dozens of countries sending delegates, running “Houses,” and learning, my primary focus is policy discussion as it pertains to entrepreneurship. With that in mind, welcome, everyone, not only to Austin or even Texas, welcome to the United States.

92% of U.S. voters say it’s difficult to start a business today. At the same time, 94% of voters, across party lines, agree that it’s vital to America’s future that everyone has a fair chance to start and grow a business. That, from the Government Leader Playbook by America the Entrepreneurial, led by Kim Lane, Victor Hwang, and John Bridgeland, with Right to Start, exposes that despite the United States being incredibly efficient and effective in startups, maintains both concern and optimism about the future.

“Innovation thrives when entrepreneurs have clear pathways, strong support systems, and access to the right resources,” shared Melissa Saavedra, one of the founding states, in her capacity as director of the Office of Entrepreneurship in Nevada. “As a Founding State, Nevada is reinforcing the right to start a business by investing in policies and programs focused on removing barriers, expanding opportunity, and empowering entrepreneurs in every corner of the state to turn ideas into lasting economic impact.”

For leaders throughout the world, I wanted to take a closer look at the question of IF California, New York, and Texas are best, that other states have advantages, and how policy shapes how states proceed, so that you might better discern where to focus your attention on the U.S. What follows is a policy-first breakdown of which states are actually structured to support entrepreneurship and which ones sort of treat startups like a revenue source. We’re going to draw from three distinct empirical data sources, each measuring a different dimension of how governments either enable or impede the people trying to build something. Understanding what those sources actually measure (and where each falls short) is as important as the rankings themselves.

The Three Data Sources Behind Rankings States in Entrepreneurship

The first source I pulled is the Tax Foundation’s 2026 State Tax Competitiveness Index, which has been published since 2003. The Index evaluates how well states structure their tax systems by comparing each state across more than 150 variables in five major areas of taxation: corporate taxes, individual income taxes, sales and excise taxes, property and wealth taxes, and unemployment insurance taxes. The Index does not purport to measure economic opportunity or freedom, or even the broad business climate, but rather tax competitiveness. A well-structured code doesn’t guarantee a thriving economy; it removes one category of headwind. Note, there is a reasonable counter-argument to using this, from the Institute on Taxation and Economic Policy, which notes that on nearly every economic measure, New Jersey outperforms Wyoming (by a long shot) because New Jersey has top-notch public schools, robust transportation infrastructure and other public goods because of revenues raised by the very taxes that land it in the bottom spot here. Structure matters, but it doesn’t make up the entire picture of what a founder needs.

The second source is Rich States, Poor States: the ALEC-Laffer State Economic Competitiveness Index, now in its 18th edition. Co-authored by Reagan economist Dr. Arthur B. Laffer, economic policy expert Stephen Moore, and ALEC Chief Economist Jonathan Williams, the index uses 15 equally weighted economic policy variables to rank states’ economic outlooks. Those variables include, essentially, the full stack of policy choices that determine operating friction for employers. Granted, I want to consider startups, not established employers, but startups endeavor to become companies so, future challenges weigh in. The critique of this index, by the Economic Opportunity Institute, finds that Laffer’s rankings have zero positive correlation to economic indicators such as state GDP growth but that’s a lagging indicator of startups, and our work here is enabling entrepreneurs; the ALEC-Laffer index is useful for understanding which states have actively chosen low-friction policy positions.

The third source is Mercatus Center’s State RegData project at QuantGov. Researchers there developed QuantGov, an open-source machine learning and text analysis platform for analyzing regulatory text, which can process large quantities of regulatory documents and allowed researchers to create State RegData, a dataset that includes various dimensions of state regulation such as volume, applicability, and complexity. They fed every state’s regulatory code into a machine learning pipeline and counted actual regulatory restrictions; instances of words like “shall,” “must,” “may not,” “required,” and “prohibited.” There were 403,774 regulatory restrictions on the books in California in 2022, which is roughly eleven times greater than the number of restrictions in Idaho, the least regulated state. This is measuring volume, not rule quality, which is an important distinction. More restrictions do not automatically mean worse outcomes, sometimes specificity protects founders too. But in aggregate, rule volume is a proxy for compliance burden, and compliance burden is a credible proxy for the cost and time drain on early-stage companies that have neither money nor legal staff to spare.

As a sanity check, the Institute for Justice’s License to Work study, which maps occupational licensing burdens by state. The legal requirement to get government permission to practice a trade or profession before you can legally charge anyone for your work, is one of the most egregious friction points for new business formation. It’s not a startup issue in the venture-backed sense (let’s be honest, entrepreneurial people tend not to care), but it matters enormously for the broader entrepreneurial ecosystem, including the freelancers, service providers, and small business owners who form the economic foundation that eventually produces the talent pools and customers that startups need.

The Ten Best States in Startup Ecosystem Development Policy

This will be fun, because I expect (and in fact hope), this will surprise most

Utah sits at the top of the ALEC-Laffer Economic Outlook rankings and has done so for years. That reflects deliberate and sustained policy choices. Utah’s leaders have consistently championed pro-taxpayer reforms, from enacting flat personal and corporate income taxes to eliminating estate and death taxes, with forward-thinking property reform further cementing the state’s reputation as a national model for economic competitiveness. For founders, this policy matters because progressive structures create marginal-rate cliffs that punish exactly the success you’re working toward (i.e. see what California and Washington are considering). The challenge for Utah’s ecosystem is talent density; the state still struggles to attract and retain the senior engineering and marketing talent that coastal hubs have in abundance, and it doesn’t yet have the density of domain-specific investors that specialized startup communities need. Fixing that requires a coordinated culture-industry pipeline strategy and, I think, an aggressive diaspora recruitment: bring back the Utah natives who went to build in San Francisco and give them a reason to come home.

Tennessee is perhaps the most interesting case on the best list precisely because its improvement is so recent and so sharp. Tennessee ranked 38th in the Tax Foundation’s tax competitiveness index in 2020 and now ranks 8th; after reducing the rates of its corporate gross receipts tax, improving its treatment of business expensing, and fully phasing out tax on individual interest and dividends income, it is one of eight states to have no individual income tax. That’s a dramatic structural transformation in five years. Nashville has been building real ecosystem momentum, and policy changes like this are what enable that momentum to compound rather than stall out as companies grow. What Tennessee needs now is more risk capital depth; the angel and early-stage VC community is still thin relative to what the deal flow will require as the ecosystem matures, and the state should be actively working to attract fund managers and family offices that are willing to deploy in the local market.

By the way, when I refer to the gaps, a fair question is how I know. My work here is assessing ecosystems throughout the world, you can get a brief of how I do that here and I’ll explaining it in detail in my forthcoming book, Startup Ecosystems.

Indiana ranks third and consistently lands in the top ten for competitiveness. Indiana has done the blocking-and-tackling work of maintaining a low, stable corporate tax rate and a regulatory environment that doesn’t make hiring feel like a liability exercise. The Midwest gets condescended to in startup discourse, which is a mistake (visit Midwest House at SXSW and talk about it); Indianapolis has genuine industry clusters in life sciences and agtech that can support real venture activity. The gap is ecosystem density: not enough accelerators, not enough specialized advisors, and not enough late-stage capital to keep companies from having to relocate to close a Series B. Indiana’s most actionable lever is building anchor institutions that prevent brain drain by giving talent a reason to stay post-exit.

North Carolina ranks fourth and is one of the more compelling cases for ecosystem growth because it already has the talent infrastructure that other high-outlook states lack. The Research Triangle (Raleigh, Durham, Chapel Hill) sits adjacent to three research universities that produce both technical graduates and faculty-led spinouts; this is rare and most universities in the U.S. are struggling with tech transfer. North Carolina’s policy posture has improved materially over the past decade. The ecosystem gap is risk capital density in the state-specific sense; a lot of Triangle-area companies find that to raise a meaningful Series A or B, they still have to pitch in Boston or New York. Seeding a state-level fund-of-funds structure to attract emerging VC managers to the market would accelerate what is already a strong trajectory.

Arizona has been working hard on the policy stack, and the Phoenix metro in particular has become a legitimate second-tier startup market driven by migration from California and a deliberate city-level effort to build density around fintech, healthcare, and semiconductor manufacturing. The state’s ranking reflects a consistently low-friction environment. The under-exploited asset here is Arizona State University, which is arguably the most entrepreneurially active public research university in the country by volume (Go Devils!). The ecosystem gap is converting that activity into real company formation: too many ASU spinouts never get past the SBIR-grant stage because they don’t encounter the right venture operators early enough – we’re going to explore the adverse implication of grants in my book. Building more structured founder-in-residence and EIR programs at the university commercialization arms would change that.

Idaho is an unusual case because it represents one of the most dramatic deregulatory efforts in recent American history. Governor Brad Little, who was sworn in at the beginning of 2019, issued two executive orders (the Red Tape Reduction Act and the Licensing Freedom Act) which helped the state cut or simplify 75% of regulations, and in 2020 he followed up with executive orders that forced an annual review of regulations and consolidated 11 separate agencies into a new Division of Occupational and Professional Licenses. I’ve explored Idaho in depth before so you can read that and see how we do that, here. That’s a governor using administrative machinery to reduce compliance burden systematically. The Boise ecosystem has grown meaningfully as a result, attracting tech workers priced out of Seattle and San Francisco. The challenge is converting those transplants into founders rather than remote employees. Boise needs a stronger Series A ecosystem and more founder communities that give transplants a reason to start something local.

South Dakota and Wyoming are interesting edge cases because they top the tax competitiveness rankings primarily on the strength of what they don’t tax. Both lack income taxes, and both are among the least regulated states by Mercatus’s restriction count. Honestly, neither has a meaningful startup ecosystem yet, which is itself a signal: policy is necessary but not sufficient. What they have is a blank canvas, and the playbook for both is similar: build connected innovation cultures, attract a handful of sector relevant anchor companies with significant impact on entrepreneurs, and foster funds of first dollars that gives local founders a reason not to flee to Denver or Minneapolis. The foundations are in place; the ingredients on which to focus are density and intentionality.

Florida has been absorbing an enormous inflow of capital, founders, and fund managers since roughly 2020. Miami in particular has become a legitimate node in the venture capital network rather than just a lifestyle destination for tech workers who like warm weather. The policy environment supports this. The challenge for Florida’s ecosystem is that a lot of what’s moved there is financial capital and fintech rather than deep technology, and the state’s research university system, while large, hasn’t historically been a major source of commercializable IP. Deepening the startup pipeline by adding existing programs that develop founders (not small businesses and not entrepreneurship studies) would help Florida’s startup activity mature from “capital-friendly” to “innovation-driven.”

Texas is simultaneously tax-competitive and actually among the five most heavily regulated states in the country by total restriction count. Interesting, that you might be able to see my motivations since I live in Austin; still, it makes the list of better states. If you’re building a construction-tech company in Texas, you will encounter a regulatory environment that is absolutely not as light as the state’s marketing suggests. If you’re building a software company, the tax and labor environment is genuinely competitive. The ecosystem is by now well-documented since so many of us have been actively doing so (which should be an example of what to do where you live: map, expose, and promote); Texas has the capital, the talent, and the deal flow to function as a legitimate tier-one market. The state still needs to address what we call the “missing-middle” (fund formation ideal post seed and still risk tolerant before Private Equity), power grid reliability issues, which is a material business continuity risk that affects all the data center growth, and manufacturing-adjacent startups in ways that get papered over in the boosterism.

The Ten States with the Most Upside in Startup Policy

Before we explore, I could just as easily have gone with what that headline implies, The Ten Worst States for Startup Policy, but the thrust of entrepreneurship and the culture in which we work, making it so distinct from business and corporate development, is that we fix the problems. In policy matters, for startups, challenges mean opportunity.

This list, in several cases, is a story of states that have mistaken the presence of innovation for the presence of a supportive policy environment, and which are now discovering the difference as capital and talent begin to relocate.

New York is dead last in tax competitiveness rankings for structural reasons: a complex, multi-bracket income tax structure, high corporate rates, and a compliance burden that functions as a permanent operating overhead for any company that scales there. New York City remains a genuine innovation hub in fintech, media, and fashion-tech, supported by talent density and network effects that policy cannot easily replicate. But that explains why companies start in New York, not why they stay, and the data on headquarters relocation tells its own story about where companies go when they’re large enough that the bill becomes material. The fix is politically difficult because New York’s fiscal structure is built on the assumption of taxing concentrated wealth but structural reform of the kind Tennessee accomplished is possible and would improve the ecosystem’s long-term substantially.

New Jersey is interesting as I referred to it as we began; driven by high income, corporate, property, and unemployment insurance taxes, New Jersey’s proximity to New York means it functions partly as an overspill market, but the policy environment makes it hard for companies to scale there independently. The most actionable reform for New Jersey would be addressing its corporate tax structure, which is punitive at exactly the point (profitability and growth) where you want companies to be investing back into headcount and R&D (which you do) rather than paying rates that rank among the highest in the nation.

California is where you should be both shocked that it’s here on our list, and at the same time not surprised if you’re paying attention to all the talk of migration from California. The most regulated state in the country, with 403,774 regulatory restrictions (roughly eleven times greater than the number of restrictions in Idaho). It’s genuinely true that California has produced the majority of the most valuable technology companies in history while ranking near the bottom of every business-friendly index. The explanation isn’t that the indices are meaningless, it’s that California’s ecosystem has historically operated on network effects, talent density, and risk capital concentration that are strong enough to overcome structural policy disadvantages. The question is whether those advantages are durable, or whether they’re eroding as capital and talent become mobile in ways they weren’t in 1995. Outflow suggests the latter. California’s most important ecosystem intervention is not tax reform (though that would help) but addressing the housing cost crisis that makes it impossible for early-stage founders without inherited wealth to survive the pre-revenue stage of company building. Founders, you don’t get funding to start.

I want to pause here as we start to get repetitive in the assessments. From the top three, let’s be brief about the rest.

Connecticut ranks 47th on tax competitiveness and scores among the highest-burden states for occupational licensing, hitting founders on both ends simultaneously. The proximity to Yale is an underexploited asset; targeted licensing reform and a more competitive corporate rate would close the gap between institutional potential and actual company formation.

Maryland is actively making things worse; there really isn’t a different way to put it if we’re being honest. The state adopted what the Tax Foundation called the most aggressive package of tax increases in the nation during 2025, including a new top marginal individual income rate of 6.5%, a 2% surtax on high earners’ capital gains, and a 3% sales tax on B2B digital services. Taxing B2B digital services in a state trying to attract tech companies is the policy equivalent of putting a toll booth on your driveway. Maryland’s DC-corridor location gives it a natural govtech and defense-adjacent advantage that its own legislature keeps undermining.

Washington at surprises people because of Seattle’s genuine tech density, but the structural explanation is that Washington implemented a new 9.9% capital gains rate and increased its estate tax from 20 to 35 percent, tied for the nation’s highest. A capital gains tax is a direct burden on the outcome founders are working toward, and a high estate tax discourages the intergenerational wealth transfer that funds angel rounds. Seattle needs more angels, not fewer.

Minnesota, Massachusetts, Vermont, and Hawaii round out the list with high burdens and significant licensing friction. Massachusetts warrants a specific note: Boston’s biotech cluster is elite, driven by the MIT-Harvard-Longwood concentration that has no real peer. Policy environments are nearly hostile and yet ecosystems thrive anyway, because we all try despite circumstances; this is why this list of opportunities is so important, you can interpret this (me) as negatively criticizing or you can look at these states as where there is tremendous potential.

For Startup Ecosystem Builders…

The most important point here is that policy is infrastructure, not atmosphere. When a state ranks poorly, it isn’t just a score on a spreadsheet, it represents real friction that falls hardest on founders with the least capital to absorb it. A $500,000 seed-stage company dealing with high costs, complex multi-bracket compliance, and licensing friction, let alone regulations that handicap upstarts and disruptors, is operating with a structural disadvantage relative to a comparable company in a state that has eliminated those headwinds. Jared Walczak wrote about wins-above-replacement framing: a well-structured code won’t make Wyoming a metropolis, nor will poor structure make Manhattan a ghost town, but policy structure does play a role in a state’s economic successes or failures, and often a substantial one.

For economic development professionals specifically, the playbook that emerges from this data is not simply “cut taxes,” so don’t infer that from much of my emphasis on that here. The states showing the most improvement (such as Tennessee and Florida) did it through structural reform: simplifying the code, eliminating bracket complexity, moving toward flat rates, and addressing specific friction points that burden founders. You can disagree with the intentions politically or even socially, but we’re here to talk about what drives entrepreneurship.

The best states still have meaningful ecosystem gaps that policy alone can’t fill: talent pipelines, risk capital density, anchor institutions, and founder communities, while the challenged states have real ecosystem assets that policy is actively undermining. Both situations are fixable with the right combination of political will and strategic coherence which, admittedly, is why I’m publishing a deeper dive in Startup Ecosystems.

If you’re a founder evaluating where to build or an investor looking at where the next generation of underpriced ecosystems will emerge, the combination of improving policy trajectory and existing institutional assets is signal worth tracking. Tennessee’s trajectory over five years is a more useful data point than California’s current rankings. Idaho’s deregulatory momentum matters more for the next decade than its current startup density. The best investment in an emerging ecosystem isn’t always the one with the best score today, it’s the one where the policy vector is pointing in the right direction and the gap between structural potential and current performance is widest.

That gap is where the real opportunity lives.