Top 10 Best Cities for Small Business

According to recent findings from the National Federation of Independent Business, small business growth is up and business owners are more optimistic about the economy. Because most small business owners open a business near their home, we would expect major U.S. cities to see their fair share of new businesses. NerdWallet Taxes examined the top 20 biggest U.S. cities to find out how welcoming they are to small businesses. We calculated total scores for each city using data on local taxes, growth rates from the Milken Institute's 2012 Best Performing City survey, and business owner opinions of the local regulatory environment from the 2013 Thumbtack Small Business Friendliness Survey. Four of the top 10 cities are located in tax-friendly Texas, while New York City and San Francisco do not make the cut.

1. Austin, Texas
Tech giants Dell and IBM make their home here, but Austin proves equally friendly to small businesses. The city scores highly thanks to no state or local personal income taxes, and its second-place rank in the Milken Institute's 2012 Best Performing Cities comes for favorable growth prospects in technology, real wages, and jobs. Austin also scored second for its hassle-free business licensing requirements, according to data from Thumbtack's 2013 Small Business Friendliness Survey.

  • Local income tax: 0% (sample median: 0%)
  • City property tax: 1.24% (sample median: 1.35%)
  • Growth rate rank: 2
  • License friendliness rank: 2

2. San Antonio
Home to big companies such as Clear Channel and Valero, San Antonio earns the second spot in our list because it has the highest ranking for friendly licensing requirements, where on average small business owners say that the city's regulatory environment is "somewhat friendly." San Antonio also scores in the top 10 for its growth prospects.

  • Local income tax: 0%
  • City property tax: 1.36%
  • Growth rate rank: 6
  • License friendliness rank: 1

3. Dallas-Fort Worth
Dallas is home to more than a dozen Fortune 500 companies, and like other Texas cities, it is very welcoming to small businesses, scoring in the top five for ease of licensing requirements and growth prospects. While it did not score highly for property taxes, Dallas is still a very attractive city for small business.

  • Local income tax: 0%
  • City property tax: 1.38%
  • Growth rate rank: 5
  • License friendliness rank: 5

4. Baltimore
One of only three East coast cities to make our list, Baltimore earned a top 10 spot because it ranked third for its hassle-free licensing requirements. One downside is that Baltimore levies personal income taxes between 1.25 and 3.2% and scores poorly because of relatively high property taxes.

  • Local income tax: 3.2%
  • City property tax: 2.27%
  • Growth rate rank: 7
  • License friendliness rank: 3

5. Houston
Houston ranks fifth, thanks to a very friendly overall tax environment. It had the third lowest city property tax rates at 1.15% and ranked third for growth prospects.

  • Local income tax: 0%
  • City property tax: 1.15%
  • Growth rate rank: 3
  • License friendliness rank: 11

6. San Jose, Calif.
The only California city to make our list, San Jose earned the No. 1 spot in America in Milken's growth ratings, largely thanks to an influx of Silicon Valley technology companies and educated labor force. The city also scored in the top 10 for low-hassle licensing requirements.

  • Local income tax: 0%
  • City property tax: 1.27%
  • Growth rate rank: 1
  • License friendliness rank: 7

7. Charlotte, N.C.
While North Carolina isn't known for its friendly income tax code, Charlotte did score highly for low unemployment tax rates and scored in the top 10 for property taxes, long-term growth prospects, and non-burdensome licensing requirements.

  • Local income tax: 0%
  • City property tax: 1.28%
  • Growth rate rank: 8
  • License friendliness rank: 10

8. Indianapolis
While not as tax-friendly as Texas cities, Indianapolis scored sixth for easy licensing requirements and 10th for future growth rates. Indianapolis ranked poorly for property taxes and also levies an income tax of 1.62%.

  • Local income tax: 1.62%
  • City property tax: 3.35%
  • Growth rate rank: 10
  • License friendliness rank: 6

9. Jacksonville, Fla.
Jacksonville scores in our top 10 largely thanks to its presence in Florida, a state with zero personal income taxes and relatively low payroll taxes. Jacksonville earned fourth place for its easy licensing requirements but scores lower for growth prospects (15th) and property taxes (12th).

  • Local income tax: 0%
  • City property tax: 1.80%
  • Growth rate rank: 15
  • License friendliness rank: 4

10. Phoenix
Phoenix earned 10th place mainly because of Arizona's tax-friendly environment: The state scores third for lowest income tax rates and second for lowest payroll taxes. Phoenix scores eighth overall for property taxes and ninth for ease of licensing requirements.

  • Local income tax: 0%
  • City property tax: 1.30%
  • Growth rate rank: 16
  • License friendliness rank: 9

Where are San Francisco and New York City?
New York and San Francisco perform poorly in the overall rankings (12th and 14th, respectively) for small businesses. For a business earning $100,000 a year in profits, New York City is the worst city from a tax standpoint. New York also scores poorly (12th) from a licensing standpoint. On the bright side, its attractive job growth rates and large workforce appeal to small businesses for ease of hiring, as it earned 11th place in the Milken study among all U.S. cities.

San Francisco did not make the list because of its difficult licensing requirements and California's high income and payroll taxes. Nonetheless, San Francisco appeals to many small businesses because of its diverse and educated workforce, favorable growth prospects, and established network of high-tech companies.

Methodology
To calculate each city's total score, we assigned weightings to the following variables: state income taxes (5%), city income taxes (10%), payroll taxes (25%), city property taxes (10%), city growth rate rankings (20%) from Milken Institute's 2012 Best Performing City survey, and ease of licensing requirements (30%) from the 2013 Thumbtack Small Business Friendliness Survey. Licensing requirements were coded from 1 to 5, where lower scores indicate friendlier requirements. To determine effective state and local taxes, we assumed the business owner files taxes jointly as married, earns $100,000 in annual profits, owns a $500,000 commercial property, maintains a $50,000 payroll with one employee, and qualifies as a new employer for state unemployment insurance tax purposes. Memphis was excluded because of data availability. Dallas and Fort Worth have been combined in accordance with the Thumbtack survey.

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