By Tim Cook and Katie Culp, KSM Location Advisors
Last month our phone rang with a prospective client looking for a site to grow that client’s business. We asked about the business, the client’s needs and expectations, and what regions the client was considering.
Texas, the client said. Has to be Texas.
Having such a specific response piqued our interest. Why Texas, we asked?
Because every time our client saw a list of the states with the best business climates, Texas always seems to be there.
Yes, these lists are useful, and increasingly our clients review rankings when pulling together their what-if lists of states to consider, especially early in the process. But these annual rankings (take your pick – Forbes, CNBC, Tax Foundation) use set criteria, and don’t appreciate the holistic, practical and nuanced elements of site-selection decision-making.
They are a bit like People magazine’s Most Beautiful People issue: beautiful yes, but arbitrarily selected and certainly in the eye of the beholder.
States, meanwhile, are caught in the crossfire, either pointing to the lists with glee or dismissing them as irrelevant. Consider that for some of the lists that came out in 2015 Ohio was fifth on one business climate ranking and 44th on another. Likewise, you might find Iowa at 10th … or 41st, depending on your list of choice.
In deals we do across the country, a multitude of issues drive location decisions. Of course, viable real estate and workforce options are requirements for every deal. But beyond that, we find there are three criteria that seem to resonate in deal after deal regardless of industry: low cost of doing business, states that generally have good incentive packages and what we call “good harmony” states.
- States that offer a low cost of doing business – Low cost of doing business reflects the day-to-day cost of operating your business (labor, real estate, taxes, utilities and logistics). States that have a low cost of doing business generally face some type of impediment to growth; conversely, states with access to mountains and oceans naturally attract a talented workforce, but tend to have a high cost of doing business. Low cost of doing business states typically require more aggressive incentives programs than their hipper counterparts. Something other than location is needed to entice business expansions. Our picks are Texas, Nebraska, North Dakota and Kentucky.
- States with creative, dynamic, and funded incentives for many shapes and sizes of deals. Having a tool chest of versatile incentives allows states to tailor their programs to the needs of the project. In our experience, South Carolina, New Jersey, Missouri, and Georgia all fit the bill. Just this fall we negotiated a deal in Missouri for a food and beverage client. The client’s new corporate headquarters brought 500 existing jobs plus 300 new jobs, and resulted in a $20 million incentive that played a key role in Missouri winning the project
2a. States that offer refundable tax credits. Simply, refundable tax credits provide cash back to businesses if the tax credit is greater than the tax owed by the business. A handful of states (Indiana, Ohio and Kentucky) offer refundable tax credits. We recently assisted a logistics company in Ohio secure a $3 million package that included refundable tax credits.
2b. Good harmony states. We define this underrated criterion as the ability for governmental agencies (city, county, state) to work well together in a non-territorial fashion, for them to deliver on promises and for them to be nimble and flexible when encountering roadblocks. Essentially, these states find ways to get the job done. Utah, Tennessee and Florida fall into this category.
These are the kinds of factors that decision-makers need to consider when weighing location choices.
”Best Of” lists are great to initiate a brainstorming exercise for a company, but they should not drive site-selection decisions. Good location decisions are often complex, and require an adjustable set of decision points that have the ability to evolve over the course of the project. Sound decisions are tailored to the needs of the company considering a variety of factors, not beholden to lists with rigid measures.
Tim Cook and Katie Culp are CEO and president, respectively, of Indianapolis-based KSM Location Advisors. They have consulted and advised clients about economic development incentives, location analysis and related economic development opportunities on more than 400 projects in all 48 contiguous states.