In 2003, Steve Schaffer started Silicon-Valley based Offers.com, a provider of online coupons. It was his second startup in the state, but Schaffer knew from the get-go that he wanted to move his operation. He was looking for a less hectic lifestyle — and a less expensive location from which to run his business.
In fact, even before he hired his first employee he conducted a nationwide search. Eventually he narrowed his list down to Denver and Austin, Texas. “After visiting both cities, it was clear to me that the business climate in Austin was very conducive to growing a company,” says Schaffer. And grow it has: Offers.com now employs 30 people and is looking to fill 10 new positions.
Listen to related podcast: One Banker’s Take on the Texas Economy.
Schaffer is just one of many who have discovered the benefits of doing business in Texas. That’s why the state has ranked at or near the top of several recent surveys of the best states for entrepreneurs and small business owners.
In its Small Business Survival Index, which ranks states according to their public policy climates for entrepreneurship, the Small Business and Entrepreneurial Council ranked Texas in its top three states, along with South Dakota and Nevada. The criteria included factors such as taxes, energy costs, government regulations and spending, and private property rights. And Austin landed the number-one spot in a survey conducted by business journals across the country that ranks metro areas that are “most conducive to the creation and development of small businesses.”
“When you look at the data, there are a lot of strong plusses in Texas that have helped the state weather the economic storm better than most,” says Raymond J. Keating, chief economist at the Small Business and Entrepreneurial Council and author of the Small Business Survival Index. “Public policy in Texas is much friendlier to business than it is in most other states.”
In Keating’s index scale, in which a lower number means a state is more business friendly, Texas was ranked number 3 with a score of 32.1, compared to 76.9 for New York and 77.7 for California, which came in at 48 and 49.
Low taxes top the list of benefits of doing business in Texas. It’s one of only four states with no state income tax (personal or corporate) or estate tax. “Also workers’ comp costs are low (0.4 on the index scale compared to 1.3 in California), there are low levels of government spending, and Texas is a right-to-work state (i.e., employees aren’t forced to join labor unions), which allows more flexibility in the workforce,” Keating says.
According to Schaffer, employee costs in Texas are lower than in California across the board. “The cost of living here is much lower, which helps keep wages down. At my former company in California, 1 of our 15 employees owned his home. Here more than half of my 30 employees own their homes.”
Austin is considered by many to be the best city in the country to start a new business in. Its population grew four times faster than the nation’s over the past five years (giving business owners a nice pool of employees to pick from) and the number of small business startups grew by 5.6 percent — nearly four times the average American city.
Isaac Barchas, director of the Austin Technology Incubator at the University of Texas at Austin, points to several other key attractions that draw entrepreneurs to Texas. “The state has made a significant investment in early-stage entrepreneurship and in the kinds of infrastructure that is useful for business,” he says. He specifically cites the high quality of public education and the state’s outstanding university and medical facilities, all of which are particularly beneficial to tech startups.
Barchas adds that the state regulatory environment is friendly to business, “and when the state does intervene, it does so in ways that are highly productive.”
“Noncompete clauses in employment agreements are typically enforceable here, compared to in my home state of California,” says Sam Reed, president of WebYES, an online marketing company. In California, “they are not enforceable unless connected to the sale of a business. Anyone running an information-based business with valuable vendor and customer lists will appreciate the legal protection Texas offers.”
Yet for many entrepreneurs, moving to Texas comes down to one single driving force: taxes. “The main reason I moved to Texas from California to start my business is no state income tax,” says Ryan Schwartz, owner of Hummingbird Ink, a public relations firm that targets progressive grassroots campaigns and businesses. “The tax code in California requires an in-depth knowledge of forms, regulations, and possible loopholes and write-offs. Overwhelmed with all the other aspects of running a small business, I decided that moving to Texas was a better option than hiring an accountant I couldn’t afford.”
“The lower tax burden in Texas really adds up when your business is profitable,” adds Schaffer. “This translates into more money that you can invest back into the business or put in your pocket.”
Don Sadler is a freelance writer specializing in business and finance. Reach him at email@example.com.