Texas is open for business

In almost every instance, a company that moves to Texas will face an overall lower tax rate for relocating. The state has no individual income tax. While every taxable entity doing business in Texas must pay a franchise or gross margin tax, it is typically lower than other states with similar taxes.

Texas also is not a throwback state. Throwback rule is an apportionment concept which requires sellers of tangible personal property to include sales in the numerator if they ship goods from in state and the company is not subject to income taxation in the destination state. These sales are “thrown back” to origination state. Twenty-two states and the District of Columbia impose throwback rules on companies in their jurisdictions that generate apportionable business income.

Texas imposes a statewide 6.25% sales and use tax on all retail sales, leases and rentals of most goods, as well as taxable services. Local taxing jurisdictions (cities, counties, special purpose districts and transit authorities) can also impose up to 2% sales and use tax for a maximum combined rate of 8.25%.

Texas does have some of the highest property taxes in the U.S., according to Smart Asset. Local jurisdictions levy property taxes to pay for education, police and fire department, public works, and other services. The average effective property tax rate in the state is 1.69%, well above the national average of 1.07%. (By comparison, the average property tax is 0.73% in California, 2.16% in Illinois; and 0.88% in New York.) Texas cities account for six of the top 10 cities with populations of 350,000 or more with the highest property taxes in the country.

Since there is no state income tax for employees who relocate, these employees get an automatic pay raise equal to the income tax paid in the state from which they moved.

Regarding regulations, companies considering building a new facility in Texas may find they can get an entire building up and running in less time than it takes to get preliminary plans approved in states with more onerous regulation requirements.

The lower level of regulation extends to the state’s power grid, which is managed separately from the two area-wide grids that manage electricity in the rest of the country – the Eastern Interconnection and the Western Interconnection. The Electric Reliability Council of Texas (ERCOT) manages the flow of electric power to more than 26 million Texas customers -- representing about 90% of the state’s electric load. Texas’ electricity grid is powered primarily from natural gas (51%), wind power (25%) and coal (13%).

Over the past decade, energy use in ERCOT increased by 20% as the Texas economy and population grew. Between 2018 and 2019, annual energy use was up 2%. Much of this growth is due to new industrial facilities along the coast near Houston and oil and gas activities in the western part of the state. At 11.44 cents per kilowatt hour, Texas is in the middle of the pack in terms of the cost of electricity compared to other states.

Companies considering a relocation to Texas should first undergo a competitive analysis:

• What is the revenue growth potential if they move to Texas?
• What are some margin improvement opportunities if they move to Texas?
• Who is their competition for talent and resources?
• Will a Texas location at least duplicate if not improve their supply chain?
• Will logistics and distribution improve in Texas?
• Are competitors and channel partners moving to Texas?

For manufacturers, especially considering recent supply chain disruptions related to tariffs and the COVID-19 pandemic, a move to Texas makes sense. Monterrey, Mexico is a short drive from the southern Texas border and a location where many companies are locating their manufacturing facilities. The new U.S., Mexico, Canada Agreement (USMCA ) will solidify the ability for American companies to access key low-cost, raw materials from Mexico, to either finish assembly in Texas, or to warehouse to ship elsewhere in the country. The central location of the state, coupled with a vast amount of land for warehousing, solves logistics and distribution problems for many types of companies, large and small.

Although some companies like Tesla will make news by building an entirely new plant in Texas, employing thousands of people, often the strategy is to move a company piecemeal. For example, a 100-person company may first move the C-suite to Texas. Then, over time, the company moves other departments while the company shifts the focus of its new hiring to Texas.

A company positioned for growth sees real opportunity in moving to Texas. A Texas move, however, can also help otherwise successful companies whose growth has flatlined. A company in this position can improve margins by tapping into less expensive labor pools, supply chains and tax environments – all of which they can find in Texas.

In the short run, manufacturing companies often will open a new facility in Texas or engage with a contract manufacturer in the state or in Mexico, while maintaining existing factories in their current location. This option reduces some of the relocation risk in the event the capacity in the original manufacturing facility decreases.

There is a herd mentality to relocating. If a company is a supplier to many other businesses, it may be hesitant to relocate to a city or state that doesn't have sufficient critical mass. While companies may be concerned existing channel partners and industry participants do not have strong presence in Texas, the trajectory of companies across industries moving to Texas shows that will be changing soon.

One final consideration: companies who have a robust strategic planning function will identify a number of initiatives to tackle for a given period. Relocation should be a strategic move and the resources to make it successful have to be accounted for, just like any other strategic initiative.

A recent article in the Harvard Business Review noted that in an industrial economy, company location decisions were often based on minimizing the cost of access to and transport of raw materials, transporting finished goods to their markets, and labor. In contrast, the driving factor in location decisions for today’s high-tech, knowledge-based companies is primarily based on access to highly educated and skilled people.

Companies considering relocation to Texas have to consider the strategic risks of relocation and mitigate those risks. Companies considering a complete relocation of a large facility with many employees should have a record of being an outstanding place to work so key employees remain committed to making the move successful. Moving a manufacturing plant – a traditional blue-collar workforce – has more complexity to it than moving the C-suite or back office functions because manufacturing plants need workers inside. Those people actually have to move or replacements need to be found in the new location.

Companies need to carefully determine how many employees are willing to make the move, and then determine if the targeted area in Texas has the right talent to fill any gaps. One of the biggest deciding factors for a relocation is an improved quality of life for a company’s employees and potential employees. A lower cost of living, especially for housing, along with highly rated schools are a draw for families. For employees who travel a lot, Texas’ central location and major airports will make it easier for them to do their jobs.

A company might consider moving to Texas if its competitors have moved to the state, as this indicates there likely is a significant talent pool available for that type of business. Austin, for example, is a miniature Silicon Valley technological hub. The area is experiencing a massive influx of companies from California, like Tesla, Oracle and Hewlett Packard, along with the talent that has gone with those relocations.

Even if a company doesn’t move to Texas, it may find itself in an unexpected talent competition with companies that have moved. Because the Texas economy is growing faster than most other states, one person may take a job there, and their spouse or partner will move and work remotely for their current employer. The spouse or partner will be exposed to many more opportunities in the booming Texas economy, so if they find their career opportunities are limited at their current job, they may have a greater opportunity at another company in Texas.

Leadership and management teams can carefully research possible Texas locations without raising concerns about a possible move with their existing workforce. A local chamber of commerce, Bureau of Labor Statistics, or executive recruiting firms or staffing companies in the target market can help a company assess availability of local talent, such as data on majors of local graduating classes or local labor pools with specific skill sets. As the decision to relocate becomes clearer, companies have to consider issues such as:

• Who are the key people they need to retain during the transition because of their essential knowledge base?
• How long do those key people need to be retained?
• What retention incentive or severance plan is needed related to these key roles?
• What positions could be moved with very little disruption to the department?

Companies also have to consider their human capital budget for a possible relocation:

• What relocation expenses will the company pay for people who move?
• Will the company fill open positions at the new location itself, or will it hire a local external staffing company or executive search firm?  
• What are the employment tax implications of moving to Texas?
• What are the benefits implications; for example, will health insurance cost more or less in Texas?

The nature of manufacturing is changing and becoming heavily automated, which in turn will affect decisions companies make as to where they locate future plants. Instead of needing several shifts of line workers, they will need smart people who understand systems, data and software to manage inputs and outputs. Companies will need space for warehouses, and fewer people, but those employees will need to know how to manage robots and automated systems.

Texas has one of the most competitive and diverse labor forces in the U.S. According to the New American Economy, a bipartisan research and advocacy organization, Texas has almost 5 million immigrant residents, accounting for 17% of the total state population. This immigrant population holds jobs in many sectors. While over 70% of this immigrant population has less than a college degree, 27% of the immigrant population have a bachelors or graduate degree, compared to 32% of U.S.-born residents with higher education degrees.

In moving to Texas, a company has to ensure it maintains its company culture, which is often the secret sauce for a successful company. Often when companies decide to move, they will place someone from the existing location in charge to better ensure that as new people are hired in the new location they match the company culture.

Cities looking to attract companies to Texas can take advantage of New Markets Tax Credits (NMTC) designed to spur investment in low-income communities. For example, after a two-year search, Audubon Metals LLC, located in Henderson, Kentucky, built its second major plant to produce secondary aluminum alloys for the manufacturing of die castings in an industrial park in Corsicana, Texas, in part because NMTCs were available to help build there. The plant is projected to create 240 permanent jobs over five years, with average earnings above the living wage for Navarro County, where Corsicana is located. Because Texas is one of the most underserved states relative to NMTCs, there is a lot more interest in community development financial institutions (CDFIs) allocating these credits to projects in Texas.

Local Economic Development Corporations (EDCs) are actively attracting companies with a variety of incentives to build in their jurisdictions. As representatives of their municipalities or counties, EDCs have the discretion to offer a variety of incentives and structure them in multiple ways. Local incentives can include, and are not limited to, free or reduced cost land, property tax abatements, job creation grants, sales tax rebates, and other unique financing options. These incentives offers by Texas EDCs can be up to approximately 10-20% of project costs when these economic development tools are combined.

For much of the past two decades, the port in Long Beach, California was the funnel for key supplies coming from China. While China was the low-cost provider of key materials, dependency on China became a disaster for many firms in the last few years, as the impact of both tariffs and the COVID-19 pandemic rattled supply chains. Suppliers are shifting operations to Mexico and Texas with this emerging as the new funnel, especially for manufacturing.

The central location of Texas, coupled with its transportation advantages and land availability for assembly plants and warehousing, makes it attractive for companies to serve customers anywhere in the country. Moving key supplies closer, like to Mexico, makes a company’s supply chain more secure, and that security outweighs the potential higher cost compared to China. Much of the secondary manufacturing for key industries like auto making – tier two, three and four suppliers – is located in Mexico and then flows back through Texas for finishing, assembling, warehousing and distribution.

The fact that Texas has become stronger in so many industries aside from oil and gas means the state has a rich secondary set of manufacturing firms to support a variety of sectors.