Really how important is business taxes? I talk about the myth of low tax utopia in this post.
The myth of the importance of low taxes
I decided to write this because of yet another debate on Hacker News about how California is somehow “losing” companies because of taxes:
You are thinking locally. Nobody cares where Tesla or Toyota build their cars. Having your business located “in the largest economy” isn’t a factor for a huge number of businesses.
Another way to put it is: You can build a massively successful business anywhere in the country. There is no particular magic in California in this regard. What is different here is that it cost more to simply exist in this state. And there’s far more to it than wages at play.
No one cares *where* their Tesla or Mazda is built. But they do care if it is built well.
Tesla does care if they can get qualified machinists to maintain the equipment that manufactures the Tesla. Sure Tesla can move to a random low tax location – and then spend years training the inexperienced low-quality workers available at the location.
It is possible, maybe. For low skill occupations, sure this is possible.
But the costs of running a business are much more than taxes and regulations:
- supply chain and logistics cost ( if suppliers are now further away there is now greater shipping and logistics management cost )
- infrastructure costs : does the selected location have an adequate power supply and transportation access
- Support services: everything from cleaners to the people who maintain the physical plant
- Access to airports so executives, customers, and suppliers can get to the plant
- relocation costs: moving existing infrastructure is not cheap.
- customer issues: if the company in question is in the middle of a supply chain: is the company now moving away from their primary customers facilities (which can make sales process more expensive and give less visibility to the customer needs)
- Will your key people agree to relocate?
- Is your key talent pool for new hires geographically fixed: There is a reason why Silicon Valley is successful place to be for software companies. There is a reason why New York/London is the place for finance. There is a reason why actors and actresses are in LA/New York/Bollywood : that is where the key talent is located.
- availability of labor: movies aren’t just about the actors and actresses. Film crews, set designers, lighting technicians, sound technicians, continuity experts, etc.: This is true for many, many industries. Detroit (area) is still the home of U.S. automakers for a reason.
So yes a business can make a decision based on taxes: Hollywood shoots movies in Vancouver, BC for a reason: but the main decisions and key talent are in LA and will always be in LA. Sure Mercedes-Benz could put a plant in Alabama and compel suppliers to move some facilities to be close to them. But could a MB supplier make the move on their own? No. That MB supplier can’t decide to move to North Dakota. Mercedes insists that part of the contractual agreement for their business is physical proximity.
When it comes to high value workers, California is the best:
- Non-compete agreements are unenforceable – I don’t have to worry that a job candidate will be blocked from joining my startup.
- Obamacare means that I can hire people from big companies without them having to worry about affordable healthcare.
- State government is pretty reasonable about things like Unemployment Insurance, etc. So I spend less time hassling with things.
- Lawyers and VCs have a reasonable attitude about certain things that make it easier to get shit done: less time dicking with screwy contracts: part of this is that California law makes some things illegal.
- educated population
- proximity to existing similar employers – new employees don’t have to relocate