After a number of years of bumper investment off the back of a prolonged period of low interest rates, 2022 has sent many startups crashing back down to earth with a bump. The year has seen many startups shedding staff left, right, and center, so it is perhaps no surprise that no stone is being left unturned in a bid to cut costs.
Research from Iowa State University shows that such strategies are likely to include moving to a lower tax territory. The researchers found that different state tax rates have a significant impact on where startups locate themselves.
“The probability of starting up on one side of the border versus the other due to tax rates is 7.5% higher in South Dakota than Iowa, but it may not be for the reasons people think. Namely, property taxes seem to matter more than other types of taxes and providing certain incentives for some businesses in Iowa may hurt others,” the researchers explain.
Across state borders
The researchers say that they focused on movement across state borders because they believe this allows them to control for otherwise unobservable local factors that might influence how businesses behave on either side of the border.
They looked at the impact of four different forms of state tax, including property and corporate income taxes, on the behavior of new businesses between 1999 and 2015.
“The reason we were particularly interested in business startups is that they may consider multiple locations to set up. They will be more sensitive to different tax rates compared to a well-established firm that would have to move all of its equipment and employees or find new workers if it jumped state lines,” they explain.
The results showed that when states have a higher tax rate of just 1% in each of the four types of states, they’re around 3% less likely to attract startups than their neighbors. This was especially so in Wyoming, which was nearly 9% more likely to attract startups than neighboring Idaho. This was especially so for property taxes, which usually have to be paid even when the startup isn’t generating much revenue and has considerable importance in the early stages of the business.
