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State Your Case

Many states are luring small businesses with big promises--so what's in it for you?
Magazine Contributor
4 min read

This story appears in the March 2005 issue of Entrepreneur. Subscribe »

Bruce Cowan is a California native. He graduated from the University of California, Los Angeles, and started electronics chip and computer products distributing company Acclaim Electronics five years ago in Carlsbad, California.

But his state of mind changed as California enacted legislation he felt was increasingly anti-business. Eventually, Cowan, 38, reached a breaking point. In November 2003, he moved the 20-employee company to Las Vegas. "I'm a political and economic refugee from California," says Cowan, who contends California has "created a hostile environment toward businesses."

"Entrepreneurial refugees" such as Cowan seek greener business pastures, and many states paint them a pretty picture. Last fall, Oregon's governor sent 250 letters to small and midsize California companies. Nevada is bombarding California with billboards and newspaper ads. South Dakota's economic development entrepreneurs compare the state's tax rates, crime index and educational statistics to those of other states.

Interstate tug-of-war over companies isn't new--in fact, it's been going on for decades. But the IBMs aren't the center of attention anymore. It's become politically attractive for budget-strapped states to lure nonpolluting, profitable entrepreneurial companies that create jobs locally. Entrepreneurial firms, meanwhile, are looking for a margin boost and less paperwork. "Even a small tax incentive providing a little more cushion here or there can make the difference for a firm," says Peter Rodriguez, who studies economic development issues and is an associate professor of business administration at the University of Virginia in Charlottesville.

Somer Hollingsworth spends his days courting entrepreneurs as CEO of the Nevada Development Authority (NDA), a nine-person Las Vegas office that sells out-of-state companies on Southern Nevada. NDA generates comparison data within 24 hours of a company's inquiry, and it's working: Between 2003 and 2004, 38 California companies relocated or expanded operations to Nevada, creating 1,500 new jobs. "California has been a happy hunting ground for us," Hollingsworth says.

Charleston, South Carolina, sells entrepreneurs on incentives such as waived fees for building renovations. "I'm very optimistic, very bullish," says Ernest Andrade, executive director of the Charleston Digital Corridor (CDC), an economic development initiative launched in 2001.

CDC has attracted 22 companies since 2001, including Digital Lifestyle Outfitters, a 4-year-old firm that produces computer and digital music player accessories, with annual sales of $20 million. The company relocated its eight-employee headquarters from Raleigh, North Carolina, to Charleston in August. Its 33-employee warehouse and distribution center stayed in Durham, North Carolina.

The move was mostly about life-style for CEO Jeff Grady, 36. He talks about the thrill of working in a vibrant downtown, then going boating at the end of the day. He also thinks the move increased the company's visibility. In Raleigh-Durham, "you can easily get overlooked," he says.

For Cowan, Nevada's tax and regulatory structure was the big draw. The state doesn't collect corporate taxes, franchise, capital gains or inventory taxes. Workers' compensation costs in California are at least twice those in Nevada. The move has saved Acclaim Electronics 40 percent in annual operating costs.

But a move could mean rebuilding relationships from scratch. Cowan lost a few employees in the move. Grady had to adjust to a smaller city with fewer service providers to choose from.

Before moving, ask yourself hard questions, Rodriguez advises. Will moving solve problems, or simply mask strategic decisions surrounding the product or service? Are the hidden costs worth the tax savings? How will the company communicate its brand and reputation in a new place?

As far as reputation goes, California has work to do. Barbara Hayes, executive director of the Sacramento Area Commerce and Trade Organization, thinks California's business climate is improving with Gov. Arnold Schwarzenegger in office. "There's a very supportive environment in the state of California for entrepreneurs," Hayes says.

But Cowan isn't California dreaming--far from it. "You'd have to be brain damaged to go back," he says. Looks like what happens in Vegas stays in Vegas, at least for now.

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