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6 ways states are creating small business hot spots — and jobs

  • Low taxes is a lure for small business. Five states — Nevada, Texas, South Dakota, Wyoming and Washington — have no income or capital gains tax, either on individuals or corporations.
  • With technology firms in places like San Francisco and Silicon Valley grappling with the problem of housing that is too expensive for their employees, states where housing is more affordable are gaining an edge.
  • Many states are investing in technology infrastructure with the hope of luring more entrepreneurs.

For 18 years Julie Albertson has tempted customers with her grandmother's pie recipes as chef and owner of Texas Pie Company. Well known for its pecan pie, the business in Kyle, Texas, started out as a wholesaler to restaurants in nearby Austin and now runs an eatery that is open to the public.

Julie Albertson, founder of the Texas Pie Company, says the environment in Texas has buoyed the growth of her business.
Source: Texas Pie Company
Julie Albertson, founder of the Texas Pie Company, says the environment in Texas has buoyed the growth of her business.

Albertson, a former banker, says the environment in Texas has buoyed the growth of her business, which has 18 employees. "We've seen a rise of tourism and people moving to the state and the Central Texas region," says Albertson. "People from all over the world are moving here." Many tell her they are drawn by the promise of good jobs in the state, as well as reasonable housing costs.

It's no accident that Albertson and many other small-business owners love doing business in Texas — which finished No. 4 in CNBC's 2017 Top States for Business rankings. Texas officials work hard to keep it that way, offering many programs to support entrepreneurs, such as one that provides grants to communities for educational programs targeting small-business owners.

"Texas really focuses on having a business-friendly climate. A reasonable regulatory climate and a low tax burden make it attractive for entrepreneurs and small-business formation," says Adriana Cruz, president of the Greater San Marcos Partnership, a public-private partnership that serves as the regional economic development organization for the City of San Marcos and two counties.

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But there's some debate about what makes states friendly to small business. Some states are trying to do what Texas does: keep taxes and regulations down. But in reality, it's a complex mix of factors that persuade entrepreneurs that a state is a good place to call home. High-tax, highly regulated states like California, home to Silicon Valley, and New York, with its Silicon Alley, offer other lures, like active venture investing communities, that keep entrepreneurs flocking.

Here is a look at six key factors that make states attractive to small business, according to experts and entrepreneurs.

1. Low taxes

It's no surprise that President Donald Trump's proposal to cut individual and corporate taxes won many fans among small-business owners. "Taxes obviously are a big issue for small businesses in terms of the bottom line, profitability and having resources to invest and grow," says Raymond Keating, chief economist for the Small Business & Entrepreneurship Council, a national nonpartisan, nonprofit small-business advocacy group.

Many states are paying attention and actively trying to lessen the sting of taxes for small-business owners to lure them from higher-tax environments. In the SBE Council's new Small Business Tax Index, which ranks state tax systems based on how they benefit entrepreneurship and small business, the top five states — Nevada, Texas, South Dakota, Wyoming and Washington — have no income or capital gains tax, either on individuals or corporations, notes Keating. "That gives them a huge competitive advantage," he says.

Many states are accelerating their tax-reform efforts to keep pace with states that are more competitive. North Carolina, No. 5 on CNBC's 2017 Top States for Business ranking, moved into the top 10 on the SBE Council's list this year after reducing taxes on both the individual and corporate side, notes Keating. Some states, such as Arizona, New Mexico and Nevada, are actively promoting their strengths to lure business from California, says Jared Walczak, a senior policy analyst at the Center for State Policy at the Tax Foundation in Washington, D.C.

Andrew Legge, founder and managing partner of Havelock Wool
Source: Havelock Wool
Andrew Legge, founder and managing partner of Havelock Wool

Andrew Legge, founder and managing partner of Havelock Wool, which makes home insulation out of sheep's wool, produces it in a 50,000-square-foot factory in Sparks, Nevada. He found that the Economic Development Authority of Western Nevada "rolled out the red carpet" as he was starting up and helped connect him to resources in the community. "My experience here has been it is extremely pro-business," says Legge, who formerly worked in private equity before starting the business in 2013.

2. A supportive regulatory environment

A high regulatory compliance burden can be a big deterrent for small business. "Regulatory costs fall much more heavily on the little guy," says Keating. In contrast, states that keep regulatory burdens low can have an edge in attracting entrepreneurs.

Ask Garrett Burchett. He started Mississippi River Distilling in LeClaire, Iowa, with his brother in 2010 after the state changed laws that allow distillers to offer tours to the public — something he thought would help such a business take off quickly. Originally from Iowa — No. 15 on CNBC's Top States for Business — Burchett had been working as a transportation planner in Dallas, while his brother worked as a TV meteorologist. They traveled to Germany to learn their new craft.

"Iowa was extremely proactive with its laws," Burchett says. "They have continued that process to make sure there are avenues for entrepreneurs to be successful. That is what brought us here." Today the business employs 16 people and has revenue in the low seven figures.

3. A rich talent pool

States with a strong network of colleges and universities often have an edge in attracting small business — especially technology start-ups. "The single biggest challenge to growing a technology company is talent," says Adam Enbar, CEO and co-founder of the Flatiron School in New York City, which offers coding boot camps and other technology education.

Cindy Whitehead, Pink Ceiling founder and former Sprout Pharmaceuticals CEO
Allen G. Breed | AP
Cindy Whitehead, Pink Ceiling founder and former Sprout Pharmaceuticals CEO

Serial entrepreneur and venture capitalist Cindy Whitehead chose to locate in North Carolina because of an ecosystem that includes easy access to talent from schools such as North Carolina State, University of North Carolina and Duke. She sold her company Sprout Pharmaceuticals, which made the drug Addyi — called the first female Viagra — to Valeant Pharmaceuticals for $1 billion in 2015.

"I'm not from Raleigh, but I picked locating here," she says. "There was a bioscience community already built. It would be easy to attract talent."

To add to their talent pool, some states, such as New York, have heavily prioritized technology education. That extends to efforts outside of traditional university settings and filters down to local programs. The NYC Web Development Fellowship, for instance, offers free training in web development at coding schools such as General Assembly, Fullstack Design Academy and The New York Code + Design Academy to New Yorkers who are at least 18 years old and earn less than $50,000.

4. Overall livability

With technology firms in places like San Francisco and Silicon Valley grappling with the problem of housing that is too expensive for their employees, states where housing is more affordable are gaining an edge. Google recently bought land for a future data center near Reno, Nevada, for instance, and Apple is doubling its workforce at the Reno Technology Center.

An area view of the Tahoe Reno Industrial Center.
David Butow | Corbis | Getty Images
An area view of the Tahoe Reno Industrial Center.

A lower cost of living helps smaller businesses, too. Iowa, for instance, has a low cost of doing business that many employers like, notes John Paul Engel, a lecturer on entrepreneurship at University of Iowa. "Commercial rents are inexpensive relative to other places in the county," says Engel.

Amenities like a good public school system are also important to attracting and keeping employees, helping some higher-cost states lure small business.

5. Abundant financing

The first place many small businesses turn for credit is their local bank. States like California, New York and Texas, which have a high density of branches, have an edge in business-friendliness on this front, because most banks still do branch-based lending, according to Rohit Arora, CEO and co-founder of Biz2Credit, an online matchmaker between borrowers and lenders based in New York City.

Having a vibrant ecosystem of angel investors and venture capitalists is important, too, and has made areas such as Silicon Valley, Boston and New York City and the states where they are located attractive to start-ups.

But with crowdfunding leveling the playing field for many entrepreneurs when it comes to raising capital, states also need to offer opportunities for mentoring by former start-up founders and retired executives, says Richard Swart, chief strategy officer for NextGen Crowdfunding in the Los Angeles area.

"That's the secret sauce of Silicon Valley," says Swart. "You have thousands of people actively involved in building companies."

6. Infrastructure investment

With the need to repair the country's aging infrastructure an issue in the last presidential election, many states are paying attention to the need to fix theirs. Iowa, for instance, has been investing heavily in upgrading its road and bridges, notes Debi Durham, director of the Iowa Economic Development Authority.

With the internet making it possible to launch tech start-ups far from Silicon Valley, many states are investing in technology infrastructure with the hope of luring more entrepreneurs and encouraging their existing business owners to stay put. "Today you can start a company where you want to live," says Enbar. "That's a fairly new thing."

In one of the larger-scale state initiatives, Iowa, which is heavily rural, has been working to connect every acre of the state to broadband in its Connect Iowa initiative. "The farmer needs it in the cab of his combine," Durham says. "Having a robust broadband system means you can work from anywhere."

— By Elaine Pofeldt, special to CNBC.com

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