Kevin Shaddy-Your Reno Realtor

Business Relocation:

Why companies are flocking to Nevada:

The tax benefits of living or running a business in Nevada are numerous:

1. No Personal Income Tax

2. No Corporate Income Tax

3. No Unitary Tax

4. No Inventory Tax

5. No Franchise Fee

6. No Estate or Gift Tax

7. No Franchise Tax on Income

Article by Philipp Harper:

Appropriately enough, the hands-down winner is Nevada, a state better known for another kind of gambling. Why? A pro-business regulatory environment, affordable housing and, I suspect, a good year-round climate have combined to make the Silver State a mecca for fast-growing startups.

I know this because I've parsed and sifted and sorted and compared a whole bunch of data assiduously collected by some very talented researchers. Then I applied my own simple and unscientific spin to come up with Microsoft bCentral's list of the 10 best and 10 worst states in which to be an entrepreneur.

In a moment, I'll present the rankings, along with some specific cities within the favored states that you might want to consider calling home because they're affordable as well as dynamic. First, though, let me give credit where it's due.

Where the rankings come from

The research I've pored through comes from two reports, both released in July 2002: "Small Business Survival Index 2002: Ranking the Policy Environment for Entrepreneurship Across the Nation" and "Entrepreneurial Hot Spots: The Best Places in America to Start and Grow a Company, 2001."

The "Survival Index" is a product of the Small Business Survival Committee, an advocacy group based in Washington, D.C. The "Entrepreneurial Hot Spots" were identified by Cognetics, a Waltham, Mass.-based firm whose main research focus is America's fastest-growing small companies. Cognetics founder David Birch introduced the term "gazelles" into the business lexicon a few years ago to describe these entrepreneurial speedsters.
Now, a bit about how the two reports were put together. Then I'll tell you how I synthesized them.

The Small Business Survival Committee's index identifies 20 different ways in which government imposes costs on business and then measures the performance of the 50 states and the District of Columbia in each area. The factors being analyzed include:

Taxes. Fully 14 of the 20 criteria involve taxes of one sort or another. In addition to taxes on personal income, capital gains, property, sales and estates, the index also weighs taxes on Internet access and gasoline, unemployment and health-insurance tax rates and whether states require super-majority votes in order to impose or increase taxes.
Electricity costs. Every business uses electricity, and how it is regulated or taxed by a state can have a significant impact on a business's bottom line.
Workers' compensation costs. The higher a state's workers' comp rates, the less friendly it is to labor-intensive business.
Total crime rate. Businesses have a powerful disincentive to establish themselves or expand in states that cannot adequately protect life and property.
Right to work. Right-to-work laws generally mean labor unions cannot enforce work stoppages.
Number of bureaucrats. It almost goes without saying that more bureaucrats mean more burdensome regulations.
State minimum wage. The minimum wage set by some states actually is higher than the federal minimum.
Each state is assigned a numerical score in each category, and then an aggregate score. The lower a state's total score, the friendlier it is to small business.

By contrast, the Cognetics measures entrepreneurial activity, as opposed to government interference. To do this, Birch and his company measure two things:

Significant starts. This is the percentage of all firms in a state or metro area made up of companies started in the last 10 years that currently employ at least five people.
Young growers. This is the percentage of young businesses in a given area that are exhibiting fast growth, as defined by a growth index that captures both percent and absolute growth — meaning that neither small or large firms are at a statistical disadvantage.
To come up with a hybrid ranking that takes into account both regulatory environment and entrepreneurial activity, I simply added the rankings assigned by the Small Business Survival Committee and Cognetics for each state. The lower the score, the higher the composite ranking.

The top 10 and bottom 10

Using that computation, here's the top 10:

And the bottom 10:

For the record, this composite ranking diverges somewhat from those by the Small Business Survival Committee (SBSC) and Cognetics.

The top 10 states for conducting small business according to the SBSC survival index: South Dakota, Nevada, Wyoming, Texas, Florida, New Hampshire, Tennessee, Washington, Mississippi, Alabama.

The Cognetics top 10: Nevada, Arizona, Utah, Georgia, Maryland, North Carolina, Delaware, Virginia, South Carolina, Alabama.

At the bottom of the heap, starting with No. 50, according to the SBSC: West Virginia, Vermont, New York, Iowa, Rhode Island, California, New Mexico, Minnesota, Maine, Hawaii.

And Cognetics 10 worst, starting with No. 50: Maine, New York, Wyoming, Pennsylvania, South Dakota, Montana, Nebraska, North Dakota, Iowa, Alaska.

Yes, there are notable disparities in the way the two lists treat individual states. For example, while South Dakota is deemed by the SBSC to have the most business-friendly of all state governments, the lack of entrepreneurial activity in that state puts it near the bottom of Cognetics' list. Clearly, regulatory policy is just one of a number of variables entrepreneurs consider when deciding where to locate their businesses.

Metro areas are ranked as well

So much for the states. It's possible to further refine your selection of a business venue by considering some available city rankings. Cognetics ranks 50 large metro areas and 25 small ones using the same measurements — significant starts, young growers — it applies to the states.

The top 10 large metro areas according to Cognetics, whose rankings are not available online:

And the best of the smaller markets: Las Vegas; Wilmington-Jacksonville, N.C.; Charleston, S.C.; Austin, Texas; Reno, Nev.; Fargo, N.D.; Sioux Falls, S.D.; Green Bay-Appleton, Wis.; Huntsville, Ala.; Lexington, Ky.

Why housing costs make a difference

Forbes magazine and the Milken Institute recently ranked 200 metro areas, based on growth in jobs, salaries and high-tech GDP. San Diego ranked No. 1 and California cities dominated this list. (The list is available online by going to Forbes.com, clicking on "Lists" at the top, and then on "Forbes/Milken Best Places" under "Places.")

The Forbes-Milken list is especially valuable because it reminds us that rankings of the best places to do business typically do not take into account affordability. Six of the top 10 cities are in California and boast average housing prices that are way out of line with average income.

I'm able to make that calculation — and you can, too — by using the National Association of Home Builders' Home Opportunity Index, which ranks metro areas according to the percentage of homes that are affordable for families at the median income.

At 50%, housing costs and income are in balance. If more than 50% is affordable for median income people, then housing in the market can be had at a relative discount. Below 50% and a premium must be paid.

Take the case of Las Vegas, for example. It's located in the No. 1-ranked state for business, according to my research, and it ranks high in both the Cognetics and Forbes-Milken lists of business-friendly cities. But is it affordable?

Yes, it is. According to the NAHB's opportunity index, more than 70% of the homes in Las Vegas are affordable for people of median income.

Conversely, in San Diego, which ranks No. 1 on the Forbes-Milken list, less than 22% of homes are within the grasp of people who earn the median income.

Housing prices may not be the key variable in deciding where you want to start a business, but surely it's an important one. And there are others: access to good education, recreation and the arts, to name a few.

Article On CNET:

High-tech rich leave taxing problems behind

By Skinny DuBaud
May 25, 2001

Part of my responsibility as a single father is to supervise the education of my 12-year-old son, Vermel. This week that meant counseling his classmate and best friend, Jai Pegue, who was despondent after drawing the shortest of 50 straws in social studies class. The consequence: Jai Pegue had to write his state report on Nevada.

"Hey, chin up, kiddo--Nevada's a terrific state," I said. "For one thing, it's at the heart of the president's energy plan."

I thought of some other things that distinguished Nevada, but remembering Jai Pegue's tender age, I kept them to myself.

At that point Vermel broke in, reading aloud from the Sunday New York Times.

"'Pick almost any index of social well-being, and Nevada ranks at or near the very bottom of the 50 states, though it ranks near the top in personal wealth,'" Vermel read. "'Besides having the highest suicide rate (almost twice the national average), Nevada has the highest adult smoking rate and the highest death rate from smoking, the highest percentage of teenagers who are high-school dropouts, the highest teenage pregnancy rate and the highest rate of firearm deaths.'"

I thought the article must be overstating the case. After all, if Nevada were in such poor shape, why would so many Silicon Valley millionaires be moving there?

It might have something to do with the difference between the California and Nevada tax codes. On the advice of their tax advisers, people who made money on stock options from companies such as Exodus, Netscape, Oracle and Sun have been establishing their legal residences in tony villages and golf communities like Montreux, Incline Village, Caughlin Ranch and Arrow Creek before selling stock acquired through option grants.

"I'm there a lot," said one nouveau Nevadan who Netscaped to the Silver State, reached at work in the Bay Area. "I sold my house here. I basically live there."

Moving to Nevada for tax purposes is nothing new; the Swiss bank account set has been doing it for years (why do you think they named it Montreux?). But the recent influx of high-tech riche has sparked a wildfire of incubators and venture funds to stimulate high-tech development in the area.

Technology megabucks are floating like a smoke ring around Reno with such outfits as Sierra VisionLaunch and its Bristlecone Ventures (launched just this week), Sierra Angels, and the Tech Alliance.

"A lot of people from Silicon Valley have moved to this area," observed Fred Sibayan, co-founder of Exodus Communications, president of Sierra Vision Launch and resident of Montreux. "They moved here for the quality of living as well as the tax reasons. These people have a lot of expertise and a wealth of knowledge that they could expose to the young companies who are moving here."

Sibayan, a native Californian who collected a Purple Heart in Vietnam and a degree from San Jose State University before co-founding Exodus, moved to Nevada the year Exodus went public and his stock options turned into a bull's-eye target for the California taxman.

Silicon Valley refugees stand to escape more than just California taxes by moving one state east. Add to taxes rolling blackouts, million-dollar one-bedroom condos, the 101 commute, and the general level of stress frazzling the state between San Jose and the Golden Gate Bridge.

Nevadans, according to Sibayan, are more laid back than Californians.

"It's a different quality of life," said the Exodus alum. "It's the sanity factor. And we're very close to the Bay Area--only 40 minutes away by plane."

One thing high-tech execs can't escape by moving to Nevada is a serious education problem.

"We're working very closely with the education system, with the University of Nevada, Reno, to bring them up to a standard when we're talking about IT," said Sibayan, who sits on the board of advisers for that university's school of engineering. "The objective is to bring the level of academia up to par with the rest of the country and what's going on with technology."

Meanwhile, Sibayan's gated community makes no bones about the attraction it holds for Californians. "There are a lot of dot-com people who have settled here," said Montreux's marketing director, who estimates that fully half the residents are from California. "We've got a good list. They come here because of the tax reasons. And it's truly gorgeous."

Certified public accountants are ominously divided on the mechanics of moving to Nevada to avoid California tax on stock sales.

"It would still show as being generated in California," said a representative for the Nevada Society of CPAs, who polled several members of her organization. "As far as we are concerned in Nevada, we would consider that foreign income, and you would have to file state income taxes in California."

But Bob Sommers, self-styled tax prophet to the high-tech stars, defended the advice he is giving his California clients.

"If the stock option is treated as compensation earned or accrued while the taxpayer resided in California, the income will be taxable in California," Sommers wrote the Rumor Mill. "Once the compensation element has been taxed and the employee holds stock, a later sale of the stock will not be taxed in California if the employee establishes a bona fide residence in another state."

Meanwhile, Nevada tax advisers say business is bringing in incoming Californians, but the state may be feeling some of the recent downturn.

"We're located in Incline Village, and we've been playing this gig for 20 years here," said George Ashley, president of Ashley Quinn. "There was a real peak not too long ago. But it's somewhat slowed down in terms of the high-tech types."

Kevin Shaddy

REALTOR/Relocation Manager

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