Startups near state lines gravitate toward side with lower property tax

May 24, 2022

University Professor Peter OrazemResearchers at Iowa State University found significantly different state tax rates affect where new businesses set up shop near state lines. Their study published in the journal Small Business Economics shows the fourth greatest distortion in the U.S. is between Iowa and its northwest neighbor.

"The probability of starting up on one side of the border versus the other due to tax rates is 7.5% higher in South Dakota than Iowa, but it may not be for the reasons people think. Namely, property taxes seem to matter more than other types of taxes and providing certain incentives for some businesses in Iowa may hurt others,” said University Professor of Economics Peter Orazem who led the study.

Orazem explained he and his team focused on state borders because this approach helps control for unobservable local factors that would influence new businesses on both sides of the border, such as an atypically strong local economy, better local access to labor or venture capital, or an unusually supportive local business community.

To collect their data, the researchers looked at the individual and combined effects of four types of state taxes (i.e., property, sales, personal income, corporate income) and pulled information on new businesses less than a year old between 1999 and 2015 from the Statistics of U.S. Businesses under the U.S. Census Bureau.

“The reason we were particularly interested in business startups is that they may consider multiple locations to set up. They will be more sensitive to different tax rates compared to a well-established firm that would have to move all of its equipment and employees or find new workers if it jumped state lines,” said Orazem.

Read the full Iowa State University News Service story here.