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For years, a small region in the western United States has served as a Mecca for technology entrepreneurs looking to follow in the footsteps of all the great founders who built their companies in a place known as Silicon Valley.
Companies including Intel, Apple, Google and Facebook, just to name a few, were all started in Silicon Valley, which is recognized the world over as the premiere source of so much technological innovation.
But are Silicon Valley's better days behind it? Silicon Valley is located in California, which was recently named the worst state to do business in the United States according to Chief Executive Magazine's annual Best and Worst States for Business survey. It's the second year in a row the state has earned the distinction.
Chief Executive’s rankings are based on the sentiments of 651 CEOs and the magazine polls them on everything from tax regime and regulatory environment to workforce talent and quality of life.
According to one CEO, "California has a good living environment but is unfavorable to business and the state taxes are not survivable." Another was more blunt: "California is terrible. Even when we’ve paid their high taxes in full, they still treat every conversation as adversarial. It’s the most difficult state in the nation. We have actually walked away from business rather than deal with the government in Sacramento."
A hefty business tax burden is certainly one of the biggest reasons California finds itself at the bottom of the list. For global perspective, consider that businesses in California face tax total rates higher than businesses in France, Spain and even Greece -- countries that I've personally witnessed my American friends criticize for having environments unfavorable to entrepreneurship and capital formation. For young bootstrapped companies with limited resources, the minimum $800 franchise tax fee that all corporations and LLCs must pay each year in California (even if they don't have earnings) could alone have a detrimental impact on businesses trying to get off the ground.
But it's not just business taxes; individual income and sales taxes in California are some of the highest in the nation, giving high-earners with mobility little incentive to stick around, at least as far as residency goes. There's also the high cost of real estate (commercial and residential), the high cost of living generally and some of the most onerous business regulations in the U.S. The situation doesn't look like it's going to get better anytime soon, as California is mired in a financial situation that caused some to compare the state to Greece as early as last year.
To be sure, California has something that money can't buy: location, location, location. For that reason alone, it will always be an attractive destination. It also has something important to startups: some great universities. But the California public university system is having its share of problems, which could have an impact on the state's talent pool going forward.
When one weighs the disadvantages of doing businesses in California against the advantages of setting up shop in the state, it's really no surprise that many have and are flocking to other states. Texas, for instance, is home to Austin, which has become a hot spot for tech in recent years. Texas, which has no state income tax and a friendly regulatory environment for business, has created 70% of all the new jobs in the United States since 2008.
Obviously, California has continued to produce high-flying tech companies over the past decade despite the worsening business environment. California-based technology startups receive venture capital funding at a greater clip than those in any other state and every year, you can count on entrepreneurs hoping to build the next Googles of the world will flock to the state to start their new businesses in Silicon Valley. The mentality of the people who come to and work in Silicon Valley is probably one of the biggest reasons Silicon Valley is getting by despite the fact that it happens to be in the "worst state to do business." That mentality isn't something that should be easily dismissed.
But as JP Donlon, Chief Executive Magazine's Editor in Chief noted in a television interview, many of Silicon Valley's most successful tech companies are expanding outside of California. "Where are the server farms? They're in...other states. Where does Intel put its next fab? Other states...not California." Indeed, Facebook, which is arguably one of the most successful startups to come out of California in recent years, is already opening offices in states like Texas and Washington, and opted to build a state-of-the-art data center in Oregon. The data center is located in an enterprise zone "which exempts projects from local property taxes while under construction and fully exempts the site from property taxes for up to 15 years once production begins." Facebook could also be exempted from income and excise taxes for 10 years as well under a state investment program. So despite all of the things that make Silicon Valley so attractive, clearly those in Silicon Valley are not unaware of the fact that other locations may be more attractive.
The reality is that in today's global economy, there is no shortage of talent around the global. Companies can locate just about anywhere and find great people. And there is no shortage of states and nations willing to let entrepreneurs and companies keep more of their earnings, and allocate their resources more freely. That's a potent combination. Even though Silicon Valley has managed to survive California's decline thus far, the big question is: how long can that last?
Photo credit: provos@monkey via Flickr.