by Chris Saxman

Small business costs and Virginia’s competitiveness in CNBC’s Top States for Business

Small businesses are central to Virginia’s economic dynamism, job creation, and regional resilience. However, higher taxes, expanding labor mandates, regulatory complexity, and litigation exposure impose disproportionate costs on small firms compared to large employers.

These pressures directly affect Virginia’s performance in CNBC’s Top States for Business rankings, particularly in categories measuring Business Friendliness, Cost of Doing Business, Workforce, and Economic Growth.

Why small businesses absorb costs differently

• Small firms lack scale to spread fixed costs such as compliance, legal counsel, and human resources.
• Owners personally absorb administrative and regulatory burdens, diverting time from growth and sales.
• Large firms amortize costs across thousands of employees; small firms experience them per hire.
• Increased risk exposure leads small businesses to delay hiring or cap headcount.

Key cost drivers affecting competitiveness

• Minimum wage increases: Raise base payroll costs and compress wage ladders, increasing total compensation expenses beyond the statutory minimum.
• Paid Family and Medical Leave (SB 2): Introduces new payroll contributions, administrative complexity, and staffing disruptions that are harder for small firms to absorb.
• Payroll taxes and mandated benefits: Increase the marginal cost of each additional employee.
• Regulatory compliance: Expands record keeping, reporting, and audit risk.
• Litigation exposure: Wage-and-hour and leave-related claims pose existential risks to small firms, unlike large corporations that treat litigation as a routine cost.

Data callouts (illustrative impacts)

• Labor costs typically represent 30–50% of operating expenses for small service-sector businesses.
• A single additional mandate can raise per-employee costs by several thousand dollars annually for firms with fewer than 20 employees.
• Temporary employee absences disproportionately affect small firms with limited redundancy.
• Compliance and legal costs consume a higher share of revenue for firms with under 50 employees than for large employers.

Connection to CNBC’s Top States for Business Rankings

• Business Friendliness: Rising fixed costs reduce Virginia’s relative attractiveness to entrepreneurs and startups.
• Cost of Doing Business: Labor mandates and compliance costs weigh more heavily on small employers.
• Workforce: Hiring constraints reduce entry-level and upward-mobility opportunities.
• Economy: Slower small-business growth limits job creation and regional economic diversification.

Policy implication

Virginia’s competitiveness depends not only on worker protections, but on whether small businesses can grow, hire, and scale.

Policies that do not account for firm size unintentionally advantage large companies, increase market concentration, and weaken business dynamism—factors directly reflected in CNBC’s rankings.

Size-sensitive policy design, administrative simplicity, and predictable legal environments are essential to sustaining Virginia’s position as a top state for business.

Chris Saxman is executive director of Virginia FREE. This commentary is excerpted with permission from his Substack account, The Intersection.