Democratic Diva

12 Jun 2012 11:29 pm
Posted by: Donna

Governor Brewer crowed on Twitter today:

CNN features AZ as nation’s #1 spot for biz startups and entrepreneurs! The Arizona Comeback continues!

Which we are no doubt supposed to attribute to her administration’s and the Legislature’s masterful handling of our state’s economy. To be sure, the CNN Money piece does rely heavily on ye olde tax cut magic to explain the high number of start-ups in our state.

1. Arizona

2011 startup rate: 520 per 100,000 adults

Arizona is a sizzling spot for startups. People were more likely to launch businesses here than in any other state in the country last year.

Arizona has benefited from a steady stream of entrepreneurs migrating from less business-friendly states like California. The lure? Business and property taxes are low, as are workers’ compensation costs, according to the Arizona Commerce Authority.

What’s more, the labor pool is highly educated, as schools such as Arizona State University and the University of Arizona churn out a steady stream of science and technology grads. The state encourages firms to upgrade employees’ skills, giving grants to those that offer in-house job training.

That’s key, since tech firms dominate Arizona’s new business landscape. Software and semiconductor makers are big here, as are solar, clean-tech and renewable energy technology firms. More traditional fields like retail and tourism also are hot.

Oh, so the People’s Republic of California must really be struggling to create new businesses these days, what with them being so hostile to entrepreneurs and all. So where do those wine-tippling socialist lawsuit-happy elitist welfare queen hippies fall on CNN’s list? You’ll find them aaaaaaaaaaall the way down here:

3. California

2011 startup rate: 440 per 100,000 adults

You might think California’s lingering budget woes, high unemployment, burdensome taxes and regulations, and highly litigious culture would spook people thinking about launching a business here.

Whatever. The Golden State has a history of embracing entrepreneurs that shows no sign of letting up. Silicon Valley continues to be the launch pad for innovative web, biotech and geeky startups galore. Hollywood’s robust entertainment industry sparks many new film- and TV-related firms.

Necessity is another driving force: California has a large population of immigrants and long-term unemployed, and many are creating small businesses as a way to earn a living, said Loren Kaye, president of the California Foundation for Commerce and Education.

Indeed, many firms with low startup and overhead costs launch and grow successfully in California, said Kaye. And, he said, they typically aren’t walloped by high taxes and reams of regulation until they grow big.

Texas, which got the #2 spot, also had 440 startups per 100K adults. Which means California is really tied for #2 but I guess they got points deducted for being such smelly commies. So let’s examine this: As a per capita percentage Arizona is starting new businesses at a whopping rate of 0.08% higher than California. In raw numbers (based on Census figures) Arizona is starting 25281 businesses a year and California is starting 124,383. In other words, California is starting nearly 5 times as many new businesses as Arizona.

CNN Money offers no real evidence to support its contention that Arizona is spawning a lot of start-ups per capita because of low taxes and a supposedly more welcoming business climate and, no, the fluffery from the AZ Commerce authority doesn’t count. And based on my own (admittedly anecdotal) observation, it seems that, as in California, lots of new businesses in Arizona are being started by long-term unemployed people who got tired of pounding the pavement and waiting for something to open up in their field so they decided to take their chance on self-employment. Which can mean anything from high-level technical consulting to selling costume jewelry.

But let’s revisit the admission that completely undermines CNN Money’s and Jan Brewer’s claim that low taxes and light regulation are causing entrepreneurs to come to Arizona in droves:

Indeed, many firms with low startup and overhead costs launch and grow successfully in California, said Kaye. And, he said, they typically aren’t walloped by high taxes and reams of regulation until they grow big.

Most startups will run at a loss the first few years in business and thus pay no taxes in whatever state they’re located. So anyone placing corporate tax policy at the forefront of the business location decision is really putting the cart in front of the horse. And small businesses (the vast majority of start-ups) never cite over-regulation as a challenge to their success. Worker’s comp is a factor only if you actually have employees, which excludes the 3/4 of US businesses that have no payroll. In other words, tax cuts and deregulation overwhelmingly favor large, established corporations. In other words, the (arguably) good news that Arizona is #1 in new business starts most likely has practically nothing to do with Governor Brewer and the Republican majority Legislature.

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