Business Formation – The Bigger Picture of Business Location Decisions

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In my previous business formation article, I discussed a Thumbtack Survey on the best States for a small business. Today I would like to follow up on that theme of business location decisions with another look at what makes one State more or less attractive than other States to business owners. I would like to first discuss a report from the Manhattan Institute concerning the Great California Exodus, how this applies on a national scale, and finally how the bigger picture impacts you and your ability to start, grow, and run your small business.

The Great California Exodus

The report that spurred me writing about this topic again today comes from the Manhattan Institute for Policy Research and is titled The Great California Exodus: A Closer Look, by Tom Gray and Robert Scardamalia.

This report reviews the rise and fall of the population movement to and from California along with the reasons why California has transitioned from a “pull-in to a push out” State. Some of the indicators seem obvious, but the links between the political decisions being made to the impact it is having on California’s bankrupt or near-bankrupt cities and their State as a whole get lost. Here is what the report details:

  • Chronic Economic Adversity – above national average unemployment.
  • Population Density – Los Angeles and Orange County are higher than almost any other city in the US, including New York and Chicago
  • Fiscal Instability – State and Local Governments constantly on rocky grounds financially (San Bernadino, Mammoth Lakes, Stockton?), which results in lower quality and higher cost for essential services and eventual tax hikes, let alone the chance at lower taxes in the future.
  • More Opportunity Elsewhere – other States have offered more to employers and their employees in terms of lower taxes, less union power, real estate prices and overall cost of living.

As we can see in cities like Detroit, MI, Allentown, PA (take a listen to the song by Billy Joel), and now the above cities in California is that when industries move away from a city, region, or state, whether for political decisions or economic reasons, the results impact everyone. What we have seen in California is the leading edge for the state that will certainly impact every person and business there.

The reality is that California is competing against every other State in the union for the best companies and people to be a part of their State and choose to bring their tax dollars and industries to them. Unfortunately for California, they are losing out on many fronts (see the map on my previous article).

National Scale

Just as towns like Detroit and Allentown have a life-cycle dependent on the economic realities that underlie the area, so states have their own industries and trends. California’s trend is downward as many businesses can be more profitable if they do business outside of that state. While they may not be trending downward in your business’ industry in particular, all of the industries interlink as populations and their demand for your products and services move with them.

On a national scale, we are seeing dramatic trends in migrating populations and businesses. One of the major driving forces in this migration are tax rates between different states. This is a combination of sales taxes, corporate taxes, income taxes, property taxes, and business license “taxes.” A good article to understand the current trends in tax differences between states is “The 10 worst States for Taxes.” This driver toward interstate migration as described in the article “Tax Exodus: 5 States That Residents Are Fleeing.” The 5 states referenced in this article include Illinois, New York, New Jersey, California, and Ohio. There are other factors to take into account in this migration, including restrictive laws and others, but it is sufficient to say that these dynamics are occurring and it affects you as a Small Business Owner.

The Small Business Owner

So we have established that states are out there impacting the migration of people between states through their various policies, but how does the bigger picture impact you and your ability to start, grow, and run your small business? Here are just a few ways that the macro scale affects your micro level operation:

  • Money… it all comes down to money! Realize that almost everything you buy, every bill you pay, every expense on your income statement is affected by taxes. This includes utilities, phone, wages, fuel, vehicles, computers, office supplies, everything! How much of your hard-earned money do you get to keep, and how much is taken to support a bloated bureaucracy?
  • Unemployment – do you live in a state that people are leaving or coming to? If people are leaving, the labor pool from which your business can draw its employees is limited. This means less skilled labor at a higher price! On the other hand, if people are migrating to your state, you will have higher skilled labor at a lower price. It again comes down to the bottom line of paying less, getting more, and keeping more in your pocket!
  • Cost of Living – same as above, but in a state with higher income, sales, and property taxes, employees don’t keep as much of their money and therefore require a higher paycheck to maintain their standard of living.
  • Customers – if you sell a product, your customers are going to have to pay more for your products in a state with a high sales tax rate than a state with a lower sales tax rate. This means lower demand for your products.
  • Vendors – your business is the customer of other businesses, meaning the same dynamic as above applies directly to how much you have to pay for the products your business uses.
  • Property taxes – if you have ever seen the property tax bill of a large retail store or a mall, you will understand that property taxes are a huge expense for any business with any level of real estate investment. Not only this, but if your business leases real estate, these taxes are passed through to you, making your rent (usually one of the larger expenses on your income statement) potentially much higher than in a state with lower taxes.
  • Competition – Shrinking markets = stronger competition over the limited market, expanding markets = less competition over a growing market. This means you can price higher, get more customers, and have a higher market share in your niche.

Wrapping Up

I hope this has helped you gain some perspective on the impact that state and national level issues could have on your business. If you are considering moving states for the reasons outlined above, you can find a lot of information online and through various forums such as Walking to Freedom to help you decide where the best place will be for your family and your business. I hope this has challenged some who are in states like California to consider the true cost and burden they are carrying in their state compared to the state next door. Good luck on your journey to making your business successful wherever you land!

Keep Reaching!


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