The Deets: Why do startups favor higher-tax states like Minnesota?

Pete Warden put together an interesting data visualization by plotting startups listed on Crunchbase by their zip codes. Not surprisingly, the found that the top zips for startups (and startup capital) are in or near Silicon Valley, Seattle, Boston, or New York City. Since he plotted the entire country, I drilled down to the Upper Midwest, where I found this view of Minnesota and the Dakotas:

Midwest Startups

Clearly, areas with higher populations are likely going to fare a bit better on this visualization, but I think it’s also showing something else. Startups don’t care about being in low-tax states. For them, the benefits outweigh the tax savings.

Here is what the greater Twin Cities metro looks like:

Midwest Startups

Startups are not only favoring a state with higher taxes, but they’re choosing for build their businesses in the highest taxed counties and highest taxed cities within those counties.

How can that be?

Startups featured on Crunchbase tend to be companies that can be run from anywhere with reliable power and a decent Internet connection. While the Twin Cities meet those criteria, a lot of other areas do as well, so what gives?

My theories:

1. Startups don’t pay a lot of taxes, because they’re not making a lot of profits.

2. Startups need smart people capable of building products and services that have never existed before. It’s likely easier for a startup’s founders to geographically surround itself with smart people than to move to a low-tax state and attempt to recruit the best and the brightest AWAY from Minneapolis to a state border city like Sioux Falls, SD or outside of Hennepin County to Delano, MN.

3. Startups are often founded by the same types of people that appreciate great restaurants, museums, trails, pro sports, theater, and nightlife. Quality of life, as they measure it, more than makes up for the difference in taxes.

Who Actually Creates Jobs?

Check out this interesting visual that compares how many jobs by year are being created in the United States by startups vs. existing companies:

Job Creation and Destruction

Why is this so?

I think it ties to one of the other reasons that Target’s support for Minnesota Forward and thus Tom Emmer is misguided. The MN Forward crowd is full of established, well-run companies that occasionally support gay bashing politicians. Their biggest issue is not gay bashing, but corporate taxes. They want them lowered or eliminated entirely. This is because their companies are mature enough that they’ve becoming focused on driving down costs over innovation. We see this with Best Buy and Target, where both company’s strength has been in their buying power. Now they’re both getting crushed online by companies who innovated and now have buying power too (Amazon).

To me, it seems darn clear that companies that have donated to MN Forward would put a lot more of those tax savings toward corporate profits than job creation.

The state would have less money to fund the amenities that attract startups, so we’d slowly slouch toward the Dakotas for startup attractiveness. Entrepreneurial Dakotans would start skipping Minneapolis and head to the coasts (where taxes and cost of living are even higher).

If any of the gubernatorial candidates are serious about job creation, they should be serious about creating an environment that attracts startups. To do that, I highly recommend that all candidates stop by Twin Cities Startup Weekend September 17-19th to talk to people who are creating new jobs by creating new, valuable products and services.

If you’re not sure what to ask them, try this: What would you do with $1 million?

Compare the answers you receive from startup founders to the answers you receive from the companies who’ve donated to MN Forward. Who will actually create great new jobs in the State of Minnesota? And what do they need to do it?

This post was written by Ed Kohler and originally published on The Deets. Follow Ed on Twitter: @edkohler

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Comments (8)

  1. Submitted by L.A. Krahn on 08/25/2010 - 08:39 am.

    Bravo to people like Ed Kohler, independent thinkers who create a thoughtful analysis that brilliantly counters a common mantra.

  2. Submitted by Dennis Tester on 08/25/2010 - 10:11 am.

    Entrepreneurs with an exciting idea launch them from their hometown, generally. When they succeed in places like Minnesota, they succeed in spite of government, not because of it.

    But the real test is what happens after they’ve been around long enough to know they’re going to make it. They move.

    I used to work for Data 100, a company that designed and manufactured telecommunications equipment back in the 1970s. Once they started selling internationally, they picked up and moved to Tennessee.

    So then I worked for the company that created and launched a software product called Authorware. When sales took off in the early 90s they picked up and moved to California.

    So then I worked for a company that designed and created computer-based training for the telecommunications industry. Once they started to expand beyond that one industry and signed some large contracts, they picked up and moved to Texas.

    So then I worked for a company that created and launched data warehousing software (Information Advantage). Once they became the industry leader, they picked up and moved to New York.

    It’s a pain in the butt when you want to live close to family but your bleeding-edge employer keeps moving to a more business-friendly state, forcing you to find a new job.

  3. Submitted by Ed Kohler on 08/25/2010 - 11:13 am.

    Dennis, you make a good point, but your examples seem strange. I don’t often hear of California and New York described as business friendly states compared to Minnesota.

    Do you have any evidence that any of the companies you cite moved elsewhere because of corporate tax differences?

  4. Submitted by Rick Prescott on 08/25/2010 - 11:16 am.

    Sounds like Dennis has had a run of pretty bad luck. But using his experience to draw the conclusion that “all successful businesses move to a more favorable tax climate” is logically perilous.

    Perhaps a study on why businesses move might be in order. My hunch is that you will find as many reasons as you find businesses. And among those who stay put, you might find just as wide a variety of reasons why they did not move.

    But the long and short is that businesses locate because of opportunity, plain and simple. The tax climate probably plays a role in that calculation, just like a hundred other variables. But it is likely rare to be found at the top of the list.

    The argument that taxes spur either this or that type of business migration is, at best, simplistic. At worst, it can do real damage to a community that feels like it has to lower taxes in order to keep businesses.

    Lower taxes, when it leads to cuts in community services (which, in anything but a robustly growing economy, it must) can just as easily lead to a lowering of the opportunity level for the success of a business.

    In other words, both lowering and raising taxes could tilt the opportunity equation one way or the other, and such changes will affect different businesses differently.

    As such, this type of argument for setting tax rates is all hat, no cattle.

  5. Submitted by Erik Hare on 08/25/2010 - 12:27 pm.

    Brilliant and thorough analysis!

    I believe that it comes down to something very simple – a startup relies far more on talent than it does on money. Places that have a concentration of people with a lot of skills are going to generate more than their share of start-ups.

    It appears to be true that start-ups require a lot of infrastructure as well. Given that so much of our state and local taxes go to education (both K-12 and higher ed) we can see that development of talent may, in fact, not be cheap. I would not doubt that other aspects of infrastructure, including ability to move goods easily, are also important.

    From this it may flow logically that the so-called “higher tax” states are actually higher investment states, and that these investments typically do in fact pay off with a more vibrant economy. Granted, this is not necessarily true – money could easily be simply wasted – but the data presented here shows that on balance it appears to work out rather well.

    If politics was focused on reality rather than sloganeering I think this would come to the foreground much more easily. Sadly, this reality only pops up when people like Ed take the time to put it together while the mainstream media merely repeats the slogans. At least it’s here.

    Thanks, Ed!

  6. Submitted by Dennis Tester on 08/25/2010 - 03:06 pm.

    Ed – the California move was to be “near silicon valley” for whatever that was worth. The excuse given for the NY move was to be near Computer Associates who was interested in buying the technology. So who knows what the real motive was.

  7. Submitted by Ed Kohler on 08/25/2010 - 07:10 pm.

    Dennis, clearly we’re in a tough position to speculate. But I think it’s safe to assume that a move to Silicon Valley doesn’t sound like something a company would do for corporate tax reasons.

  8. Submitted by Richard Schulze on 08/26/2010 - 06:43 am.

    Tax reform is all about efficiency gains. They’re not easy to measure. They don’t lend themselves to politically charged sound bites, but they do improve long-run productivity.

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