Startling new business formation data - turns out businesses like states that don’t punish them
Entrepreneurs do not start businesses in a vacuum.
They make decisions in an environment created in significant part by public policy: taxes, labor costs, licensing requirements, regulatory complexity, the cost of hiring employees, and the amount of uncertainty government introduces into long-term planning.
Those policies cannot explain everything about why businesses start in one state rather than another. Population growth matters. Migration matters. Access to capital matters. Industry clusters, demographics, geography, universities and decades of accumulated economic development all matter.
But public policy matters too.
And a new ranking of business formation across the 50 states provides a revealing look at just how differently entrepreneurship is unfolding across America.
The 2025 Business Formation Reality Score, published by SMB Statistics and updated in July 2026, attempts to measure something more meaningful than the raw number of people applying for Employer Identification Numbers. Instead, it tries to determine whether those applications are actually turning into businesses likely to employ workers.
The results are striking.
Montana ranks first in America.
Idaho ranks third.
Washington ranks fifteenth.
And when the underlying data are examined more closely, the gap between these neighboring Western states becomes even more consequential.
For every 10,000 residents, Montana is projected to produce 21 new employer businesses. Idaho is projected to produce 18.1.
Washington produces just 14.3.
That means Montana is producing projected employer businesses at a rate approximately 47 percent higher than Washington, while Idaho's rate is roughly 27 percent higher.
The difference raises an important question for policymakers:
Why are entrepreneurs in Montana and Idaho apparently having greater success turning business ideas into actual employers than entrepreneurs in Washington?
The answer is unlikely to be a single tax or regulation.
But taken together, the policy environments of these states point toward a larger lesson: government can either lower the price of entrepreneurship or raise it.
Increasingly, Montana and Idaho have chosen the former.
Washington has been moving toward the latter.
The Business Formation Reality Score is valuable partly because it attempts to solve an obvious problem with conventional business-formation statistics.
Simply counting business applications can produce misleading results.
States such as Wyoming and Delaware attract enormous numbers of legal registrations from companies whose owners, workers and customers may actually be located somewhere else. An entrepreneur living in another state can organize a company in Wyoming or Delaware and use a registered-agent address there even though little or none of the company's economic activity occurs within the state.
The score therefore tries to distinguish between legal registrations and genuine employer-business formation.
Its five underlying measures are:
projected employer formations per resident;
projected formations relative to existing employer establishments;
planned-wage business applications per resident;
private-establishment growth; and
the density of unincorporated business returns and forms.
It then applies a filing-distortion adjustment designed to identify states where raw applications appear disproportionately driven by entity-registration activity rather than actual businesses operating locally.
The effect is substantial.
Wyoming has an extraordinary 63.6 projected formations per 10,000 residents before the adjustment, but its filing-distortion index is classified as “Extreme.” The state falls to 29th in the final ranking.
Delaware similarly falls to 19th.
Montana and Idaho, by contrast, receive no distortion penalty. Their application activity is classified as broadly consistent with genuine employer-formation measures.
That makes their rankings particularly noteworthy.
The final top five are:
Rank | State | Score | Projected employer formations per 10,000 |
1 | Montana | 88.9 | 21.0 |
2 | Nevada | 86.1 | 16.0 |
3 | Idaho | 85.3 | 18.1 |
4 | Utah | 84.6 | 17.4 |
5 | Colorado | 82.1 | 17.3 |
Washington comes in at #15, with a score of 62.8 and 14.3 projected employer formations per 10,000 residents.
For residents of the Northwest, this creates something close to a natural policy experiment.
Consider the regional comparison:
State | Formation Reality rank | Score | Formations per 10,000 |
Montana | 1 | 88.9 | 21.0 |
Idaho | 3 | 85.3 | 18.1 |
Oregon | 14 | 65.9 | 14.3 |
Washington | 15 | 62.8 | 14.3 |
Washington is certainly not an economically unsuccessful state.
It is home to Microsoft, Amazon, Costco, Boeing and numerous other globally significant businesses. It has world-class research institutions, substantial venture capital, major ports, a highly educated workforce and a technology ecosystem most states would envy.
In fact, Washington's real GDP increased at a 4.5 percent annual rate during the first quarter of 2026, the fastest growth of any state during that quarter, according to the U.S. Bureau of Economic Analysis. The information sector was the leading contributor.
That fact is essential to understanding the argument.
The question is not whether Washington has a strong economy.
It does.
The more interesting question is this: Given Washington's extraordinary economic advantages, why is the state not producing employer businesses at anything close to the rate seen in Montana and Idaho?
Washington reported 142,196 business applications in 2025, and the Business Formation Reality Score projects 11,475 eventual employer formations from that activity. Its underlying application rate is therefore not the central problem.
People are still interested in starting things in Washington.
The difficulty appears farther down the entrepreneurial pipeline: turning an idea, side business or application into a business capable of employing people and growing.
And this is precisely where public policy has the potential to matter.
Idaho's approach to regulation offers perhaps the clearest contrast with Washington.
Rather than treating the existing body of administrative rules as permanent, Idaho instituted a process under which regulations had to be continually reconsidered and justified.
When Gov. Brad Little entered office in 2019, Idaho's administrative code contained 736 chapters, more than 8,200 pages and at least 72,000 regulatory restrictions.
The administration subsequently launched a broad regulatory-reduction effort.
An initial “Red Tape Reduction Act” directed state agencies proposing a new rule to identify at least two existing rules for repeal or significant simplification. Idaho followed that with a zero-based regulation initiative requiring agencies to periodically review existing rule chapters rather than simply assuming they should continue indefinitely.
According to the governor's office, Idaho's administrative code ultimately fell from 736 chapters and more than 8,200 pages to 381 chapters and 4,659 pages. The Idaho Legislature made the periodic zero-based review process permanent in 2023, requiring rule chapters to undergo review every eight years.
Government claims about deregulation should always be evaluated carefully; eliminating an obsolete paragraph is not economically equivalent to removing a major occupational or permitting barrier.
Still, the institutional philosophy is significant.
Idaho created a system in which agencies are repeatedly asked: Does this rule still need to exist?
That is very different from a regulatory system in which old requirements simply accumulate as new requirements are added.
Idaho has simultaneously been reducing taxes.
In 2025, lawmakers lowered the state's individual and business income-tax rate from 5.695 percent to 5.3 percent, part of a tax package estimated at $253 million.
The Tax Foundation's 2026 State Tax Competitiveness Index now ranks Idaho #9 nationally.
Its component rankings include:
Category | Idaho rank |
Overall tax competitiveness | 9 |
Corporate taxes | 21 |
Individual income taxes | 14 |
Sales taxes | 8 |
Property taxes | 3 |
Unemployment insurance taxes | 36 |
Idaho is not perfect.
Its unemployment-insurance tax system ranks poorly. Its corporate tax structure is closer to the middle of the pack than the top. Tax Foundation also identifies features of its corporate tax code that could discourage investment.
That makes Idaho's example more useful, not less.
The lesson is not that a state must abolish government or eliminate taxation.
It is that a state can make a conscious effort to lower regulatory friction, simplify government and keep taxes comparatively competitive.
Montana may offer an even more surprising example. Its final Formation Reality Score is 88.9, the highest in America.
The state records:
21.0 projected employer formations per 10,000 residents;
20.4 planned-wage applications per 10,000;
and a 28.7 percent establishment-growth figure in the underlying score methodology.
The score also reports approximately 1,000.6 unincorporated returns or forms per 10,000 residents, another indication of substantial entrepreneurial activity.
Montana's tax structure is also among the most competitive in the country.
Tax Foundation ranks Montana #6 overall in its 2026 State Tax Competitiveness Index.
Montana has no general state sales tax and no estate or inheritance tax. Its corporate income tax rate is 6.75 percent. The top individual income-tax rate is 5.65 percent in 2026, down from 6.9 percent before a series of reforms, and is scheduled to decline further to 5.4 percent in 2027.
Montana certainly has policy challenges of its own.
Tax Foundation ranks its corporate-tax structure only 24th, its property-tax structure 17th and unemployment-insurance taxes 25th. Recent property-tax changes have also produced criticism over how burdens are distributed among different classes of property.
Once again, however, the larger picture is revealing.
Montana does not have the technology ecosystem of Seattle.
It does not have Microsoft's headquarters. It does not have Amazon's headquarters. It does not possess Washington's large Pacific ports or its concentration of research and engineering talent.
Yet relative to its population, Montana is currently generating projected employer businesses at a substantially higher rate.
That deserves policymakers' attention.
Washington's tax structure operates very differently.
The state does not impose a conventional corporate income tax. At first glance, that sounds highly business friendly.
But Washington replaces it with the Business & Occupation tax, or B&O tax—a gross-receipts tax imposed on business revenue rather than net profit.
That distinction is economically important.
A conventional corporate income tax generally applies after a company subtracts eligible business expenses and determines its taxable profit.
A gross-receipts tax can be owed even when profit margins are extremely small.
Imagine two businesses generating $1 million in revenue.
One earns a 30 percent margin.
The other earns a 2 percent margin.
A tax on profit recognizes that these companies have dramatically different ability to pay.
A tax imposed on gross receipts does not necessarily do so.
The Tax Foundation argues that Washington's B&O tax can therefore create particularly high effective tax burdens for low-margin businesses. Gross-receipts taxation can also cause “tax pyramiding,” because taxes may become embedded at multiple stages as companies purchase goods and services from one another.
This is one reason Washington ranks #47 nationally on the corporate-tax component of Tax Foundation's index.
Beginning October 1, 2025, Washington also increased B&O rates for businesses in the Service and Other Activities classification.
The rates are now:
Prior-year taxable income | B&O rate |
Less than $1 million | 1.5% |
$1 million–$4,999,999.99 | 1.75% |
$5 million or more | 2.1% |
Again, these rates apply to taxable gross receipts under the classification—not simply to profit.
For a mature, high-margin company, that may be manageable.
For a young company operating on thin margins and deciding whether it can afford its next employee, the calculation may look very different.
The broader comparison among the three states is difficult to ignore.
The Tax Foundation's 2026 rankings are:
State | Tax competitiveness rank |
Montana | 6 |
Idaho | 9 |
Washington | 45 |
Washington's component rankings are especially notable.
The Tax Foundation places the state near the bottom nationally for both corporate taxation and sales taxation and ranks Washington 45th overall.
Policymakers have increasingly layered other taxes onto business activity, investment, income and capital gains.
Washington also retains an estate tax.
A 2025 change temporarily produced estate-tax rates as high as 35 percent for deaths occurring between July 1, 2025 and June 30, 2026. Under current law, for deaths occurring on or after July 1, 2026, Washington's estate-tax schedule again ranges from 10 to 20 percent, with a $3 million filing threshold and exclusion amount.
Montana, by contrast, currently imposes neither an estate nor inheritance tax.
These policies do not cause every successful founder to pack up and move across state lines.
But economic decisions often happen at the margin.
A tax does not need to drive every entrepreneur away to affect economic behavior.
It only needs to change enough decisions about where companies are located, whether investments are made, whether an owner expands and whether a business is sold.
One of the most important aspects of the Formation Reality Score is that it is not merely measuring self-employment.
It is trying to identify businesses that become employers.
That makes the cost of crossing the line from entrepreneur to employer especially relevant.
Washington's statewide minimum wage is $17.13 per hour in 2026, up from $16.66 in 2025. Some local jurisdictions impose still-higher wage requirements.
Washington's overtime-exemption threshold is also tied to the state minimum wage. In 2026, covered employers generally must pay qualifying exempt employees at least 2.25 times the state minimum wage, or $1,541.70 per week.
There are important arguments on both sides of minimum-wage policy.
The costs fall especially heavily on labor-intensive businesses and can reduce hiring opportunities for inexperienced workers.
For purposes of business formation, however, one point is unavoidable: A higher mandated cost of labor raises the financial threshold an entrepreneur must cross before hiring someone.
That distinction may matter relatively little to a company employing 50,000 people.
It can matter enormously to a business owner deciding whether to hire employee number one.
That is exactly the transition policymakers should be thinking about when examining employer-formation statistics.
An individual running a profitable one-person operation may be willing to remain self-employed.
Turning that operation into a five-person company means accepting payroll taxes, wage mandates, unemployment insurance, workers' compensation requirements, employment regulations, scheduling rules and a larger administrative burden.
The more expensive and complicated government makes that transition, the more businesses will rationally choose not to make it.
In the end, for every 10,000 residents:
Montana produces 21 projected employer businesses.
Idaho produces 18.1.
Washington produces 14.3.
Montana's employer-formation rate is approximately 47 percent higher than Washington's.
Idaho's is approximately 27 percent higher.
At the same time:
Montana ranks #6 for tax competitiveness.
Idaho ranks #9.
Washington ranks #45.
The Business Formation Reality rankings suggest America's states are getting very different results.
Montana and Idaho should not be viewed as proof that every tax cut produces another entrepreneur or that every regulation destroys a business.
They should be viewed as evidence that a consistent policy orientation toward lower barriers, competitive taxation and regulatory restraint can coexist with extraordinarily strong business formation.
Every state sets a price on entrepreneurship.
The emerging evidence from Montana, Idaho and Washington suggests that price matters.
