Low-Tax States Do Not Draw Small Businesses
Often times lawmakers in states across the country argue that tax policies in their states for small business must be more favorable than other states. The argument is that lower taxes or benefits for the small business will attract new entrepreneurs from neighboring states, thus increasing economic growth and helping with employment in the state.
The theater that takes place on the floor of many statehouse chambers ignores on simple reality: Taxes in states do very little to influence an entrepreneur’s decision on where to operate. It is because no state has the ideal tax policy for the many different entrepreneurs opening new businesses. Usually tax policies in states suit a certain type of business. For example, states that have favorable tax benefits for new companies may not be as favorable for small businesses that are well established. Those that may be good for a new partnership are not as good for C-corp. A state that is good for a service company probably is not good for a manufacturing company.
In addition, states that offer the lowest state tax burden are not always the ones that attract the most businesses that are starting new. States that have high taxes also seem to offer other advantages that help offset the higher taxes. Even if a state is near utopia tax burden wise, it still has very little influence over a person’s decision on where to start a business. A very small percentage of people change their city or state to start a new business. Only 2% move to different states annually and only one half of one percent both change states and start a new business annually, said research from the Small Business Administration.