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Business Advocates Question Maryland’s Low Score in Startup Study

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A WalletHub study released on July 5 ranked Maryland the third worst state in the nation to start a business.

In the study, purported business experts looked at criteria across the key dimensions of business environment, access to resources and business costs.

It’s no secret that Maryland’s office rents are comparatively high, and the state’s legislature has a robust track record when it comes to innovation in new ways to wring money from citizens and corporate entities. But business advocates at the state and local levels say the study hardly paints an accurate picture of Maryland’s startup friendliness.
First the findings.

In the study, WalletHub’s analysts compared the 50 states across 20 key indicators of startup success to determine the most fertile grounds in which to launch and grow an enterprise.

Maryland ranked dead last in a comparison of labor costs, 46th in terms of office space expense, and somehow managed to get beaten by states like Mississippi and West Virginia in access to financing — despite West Virginia posting the lowest average growth in the number of small businesses.

Interesting to note, the experts cited in the study did not share the same viewpoint on the use of tax breaks or other incentives as a tool to encourage new business growth.

“They are a bad investment for states,” said Stephen Martin, professor of economics in the Krannert School of Management at Purdue University, terming them “beggar-my-neighbor policies” that end up reducing and shifting revenues from one state to another.

Conversely, Ron Duska, an adjunct professor at St. Joseph’s University and at Villanova University, said tax breaks and other incentives “are not only a good investment, but seem to be called for. As the old adage goes, you catch more flies with honey than with vinegar.”

Most of the other experts cited in the study hedged their responses to give the standard non-committal “it all depends” answer.

Survey Says

WalletHub posted its findings online, but did not provide access to its raw data and only included the top and bottom five states in the key indicator categories, making it difficult, if not impossible, to discern just where Maryland really stands in comparison to other states in the categories of availability of human capital, total spending on incentives as a percentage of Gross Domestic Product and, for some reason, longest average work week.

“We’re a little disappointed with the study,” said Maryland Department of Commerce Deputy Secretary of Commerce Benjamin Wu. “We really don’t think it accurately reflects the positive environment that we have to offer here in Maryland, particularly when other studies put us in the top 10.”

The latest Ewing Marion Kauffman Foundation’s Index of Startup Activity ranked Maryland No. 2 in terms of startup growth.
“[WalletHub] didn’t measure things like intellectual capital or access to a skilled workforce,” said Howard County Economic Development Authority CEO Larry Twele. “That’s our strong suit. It’s a spurious method of ranking states.”

Also missing from the data points were criteria such as connectivity, proximity to research institutes and other means of government support, all things that make Maryland an attractive location for startups.
“TEDCO [the Maryland Technology Development Corp.] does a lot of startup financing on the technology side,” Wu said, while a thriving incubator system and spin-off activity from larger firms add considerable muscle to the state’s startup ecosystem.

Access to financing is important, he agreed, but access to capital in general — another facet the study didn’t consider — is of more use to startup businesses and provides a more accurate gauge of a supportive environment.

TEDCO officials were unavailable for comment.

“Gov. Hogan and the Department of Commerce are trying to improve the access startups have to different sources of funding,” Wu said. “We’re trying to connect venture capitalists, both nationally and locally, and introduce them to the opportunity that we have here in the startup community.”

It’s a strategy aimed at trying to position Maryland on the same level playing field that Silicon Valley and Boston enjoy.

Few venture capitalists look to West Virginia for opportunity, Wu said, because the access to an educated and skilled workforce there is limited.

Apples/Oranges

Most entrepreneurs would consider it pointless to compare the tax environment of their home state with any noncontiguous state, and even then it might be a stretch.

“It does not seem likely that an entrepreneur in California will start a business in, say, Indiana, because of the difference in corporate tax rates,” as Martin said.

Hobson’s choice or not, it’s primarily the merits of the startup itself, not the environment it inhabits, that plays the most significant role in its success.

“How many times do we hear about growth in the startup environment in Silicon Valley, yet nobody ever talks about the tax rate in California as a negative,” Twele said. “Silicon Valley is in the heart of one of the highest taxed and overregulated states, but nobody’s scared away by that.”
And even if corporate taxes may be higher in one state than another, “what do you get for those taxes?” Twele asked. “A study like this should also consider the value gained from those taxes: a good education system, infrastructure, not just access to a workforce, but access to a skilled, educated workforce.”

Streamlining

“Being a startup is not easy, and we recognize that here in Maryland,” Wu said. “The governor is working with us to help streamline the process and make [government] work a little more efficiently for business,” Wu said.

Transitioning the Department of Business and Economic Development into the Department of Commerce in October 2015 helped bring more of a customer focus to the forefront, he said, enabling greater inter-agency collaboration.

“Gov. Hogan’s More Jobs for Marylanders Act that became law during the last session is also a positive step in this direction, bringing more incentives to help new businesses get started and create new jobs,” Wu said. “We don’t necessarily see any particular industry sectors that are struggling in terms of startups, but they all share a need for capital. It’s our job to try to provide the resources startups need.”

“From what we see at the local level, activity is very brisk,” Twele said. “The [WalletHub] study doesn’t tell the whole story, and there are certainly a lot of startups out there that can refute the notion that this is a bad place for business.”