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When it comes to attracting corporations to Michigan, talent tops low tax

Jun 6, 2016

The Next Idea

Six presidential campaigns later I’ve still got Bill Clinton’s iconic 1992 slogan running through my head: It’s the economy, stupid.

Jeff DeGraff of the University of Michigan Ross School of Business
Credit University of Michigan Ross School of Business

But it’s not the economy that I’m thinking about -- it’s the corporate relocation that’s on my mind.

What was so effective about Clinton’s irresistible one-liner is the way it redirected American attention.

He not-so-politely told us that, when it came to diagnosing national unrest, we were getting it wrong.

Similarly, the press is missing the real issue when it comes to corporate relocations.

Recent articles in The Washington Post and The Wall Street Journal highlight the stories of businesses moving headquarters domestically and internationally for tax concerns.

While it’s certainly true that some companies are abandoning their states and the U.S. altogether to dodge taxes, the media is overstating the importance of these fiscally-motivated moves.

Much more significant are the large multinational manufacturers that are actually relocating to higher tax areas to attract the best talent and to develop a line of sight toward emerging markets and technologies.

For example, in the early 2000s, Boeing moved from Seattle to Chicago.

The press is missing the real issue when it comes to corporate relocations.

Part of the organization’s justification was that Chicago, with its wide array of top educational institutions, provided more opportunity to attract new talent.

Last year, Cadillac moved from Detroit to New York City, which of course has a much higher tax rate.

And General Electric, just this past month, moved from Fairfield, Connecticut, to Boston.

The traditional argument is that lower tax rates attract the best companies but the numbers suggest otherwise.

The states with the highest amount of venture capital per person, which is an indicator of growth potential, are California, Massachusetts and New York.

These are also among the top tier of places with the biggest state and local tax rates.

So why are all these giant, multinational companies with wide array of moving parts and pieces moving to these expensive locales?

It turns out that all three states are also among the very top tier of higher education rates.

The people who live in these places are more likely to have graduate degrees than their peers elsewhere, and the states themselves are abundant with elite research universities and institutes.

Additionally, they have diverse and multicultural populations with global perspectives on all issues.

It's become clear: organizations locate in places where top talent is readily available.

This is becoming especially important because these multinational companies are making more and more of their profits in countries outside of the U.S.

The trend goes beyond these three states.

Forbes’ list of the most-educated American cities are disproportionately college towns with significantly higher employment rates and far better paying jobs than the rest of their surrounding regions.

While some of these jobs are associated with academic institutions, most of them are with companies that have built around these areas to get talent.

It’s become clear: organizations locate in places where top talent is readily available.

People want to live in these areas because of access to culture and education.

Furthermore, these spots are typically more inclusive than other locales because they’ve historically welcomed people from all over the world and embraced a multiplicity of worldviews.

The lure of great talent is so attractive to organizations that it overshadows the expense of higher taxes.

Innovation assets are intangible.

They walk in and out the door every day with the workforce.

Talent can be located anywhere.

Most of us want to pay less taxes, see our investments create huge returns in the very near future, and only live with people who appreciate our work.

But attracting top talent to make innovation happen isn’t about what we like -- it’s about what we need, stupid.

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