◼ TECHNOLOGY Bloomberg Businessweek August 19, 2019
23THE BOTTOM LINE Startups notching big exits have been able
to get more tax breaks after they’ve sold, often at the expense of
schools and other public-service budgets.received $55 million m ore in tax breaks from the
city, even as Columbus was slashing its education
budget and programs to battle mounting deficits.
The teachers say that their politicians shouldn’t have
taken the company’s threats to move CoverMyMeds
and its 1,000 employees to the suburbs so seriously,
and that McKesson, which reports about $2 billion
in profit most years, can pay its own way.
“They want to feel like they are good neigh-
bors,” says John Coneglio, president of the teach-
ers union. “Well, what’s best for your community
is to pay your taxes.” CoverMyMeds said in a state-
ment that the undeveloped land where its new
offices will be built had generated only $32,821 for
the school district and will now bring in $649,000 a
year. But under the deal, the school district, Ohio’s
largest, must wait 15 years bef ore the company pays
its full $3.6 million annual tax bill.
Development officials in Columbus say tax
incentives are critical to keeping companies such
as CoverMyMeds, which are “inherently portable,”
according to the city’s development director, Steve
Schoeny. Yet this spring, McKesson moved its own
headquarters from San Francisco to Irving, Texas,
without getting a dime to do so. (It was offered
incentives earlier in its development in Texas but
didn’t meet the requirements needed to collect
them.) Pittsburgh hasn’t given MModal, its home-
grown maker of transcription software, any more
tax breaks since 3M Co. bought the company for
$1 billion in December. “Anyone that has that kind
of money will always say, ‘We’ll just go somewhere
else,’ ” Coneglio says. “Well, you don’t know if you
don’t say no. What about saying no?”
Saying no has proven a tough proposition for cit-
ies throughout the Midwest. While tech startups
are far from the only businesses seeking tax incen-
tives wherever they can, their success almost always
means an exit that siphons money away from the
region to venture investors elsewhere, even as the
new parent company demands more subsidies from
the startup’s hometown. “It’s a horrible irony,” says
John Austin, director of the Michigan Economic
Center, who says only early-stage startups should
benefit from public funds. “We don’t end up the
home of the money and control. You are subsidizing
an entity that’s going to do what it wants anyway—
and giving away dollars that could educate your local
population to a higher level or build your transporta-
tion system to make the region more vibrant.”
The protests in Columbus against CoverMyMeds
may represent a new front amid a wave of teachers
strikes, which until now haven’t called out a home-
grown startup by name. Educators in particular are
pressing the issue, faced with crumbling schools
and stagnant pay. In Indiana, where teacher sala-
ries have fallen and schools are struggling to close
funding gaps, the capital city of Indianapolis has
given ExactTarget, a software company that auto-
mates email marketing, some $60million i n tax
abatements to stick around: $43 million pr ior to its
$2.5 billion acquisition by Salesforce.com Inc. six
years ago, and $18 million since.
“The abatements in Indiana are a killer,” says
Jennifer McCormick, Indiana’s schools superinten-
dent, adding that Salesforce’s $1.7 million in grants to
the Indianapolis Public Schools doesn’t make up for
the millions more the district might have seen had
the company just paid its taxes. Salesforce, which
is based in San Francisco and has a market value
of more than $120 billion, declined to comment on
whether the incentives were determinative.
City officials aren’t crazy to think valuable start-
ups might move elsewhere. St. Louis still rues let-
ting Square, the digital credit processing company,
move to San Francisco in 2009 without a fight. “They
couldn’t find enough local talent here,” says Cliff
Holekamp, co-founder of Cultivation Capital, a local
venture firm. “There’s this huge sense that we totally
missed the boat.” (It might also have had something
to do with co-founder Jack Dorsey, who was raised
in St. Louis, living in San Francisco.) Since Square’s
$3 billion initial public offering in 2015, St. Louis has
given it about $5 million, and Square has hired about
500 people in the area. Square declined to comment
on whether the incentives were determinative.
Instead of giving established startups incentives,
public dollars are best used investing in companies’
earliest stages, says Paul Krutko, president of Ann
Arbor Spark, the region’s economic development
entity. His team gave local startup Duo Security Inc.
$3 million f or an office space expansion before, not
after, Cisco Systems Inc. acquired it for $2.4 billion
last year. “It’s about gardening vs. big-game hunt-
ing,” Krutko says. “We believe in gardening.”
In Columbus, the school district hired a pri-
vate contractor over the summer to replace strik-
ing teachers, who demanded better pay as well
as influence over tax abatements such as the one
CoverMyMeds got after it sold. This would be
unprecedented power for a teachers union. “We
are always being told there is no money for what
we need as teachers,” says Coneglio. “We want a
say in the process so next time there is a big deal
worked out behind closed doors, what the schools
and teachers need comes first, not the needs of
another wealthy corporation.” �Mya Frazier“Anyone that
has that kind
of money will
always say,
‘We’ll just go
somewhere
else.’ Well, you
don’t know if
you don’t say
no. What about
saying no?”