Supporting homegrown startups and young, fast-growing in-state companies is likely to be a more effective strategy for states to create jobs and build a strong economy than across-the-board tax cuts and other attempts to lure businesses from elsewhere that many states pursue today.
A new report released by the Center on Budget and Policy Priorities titled “State Job Creation Strategies Often Off Base” highlights findings from new research showing that the vast majority of jobs are created by businesses that start up or are already present in a state. The report’s authors conclude that “many state policymakers pursue economic development strategies that are bound to fail because they ignore these fundamental realities about job creation.”
When states pursue tax cuts, they divert resources needed to help home-grown startups and young, fast-growing companies deliver maximum job growth and to build a climate that supports their growth.
Never has the cost of tax cuts to job creation been clearer than in North Carolina where state leaders’ pursuit of income tax cuts has reduced dollars targeted to help entrepreneurs in North Carolina build out their ideas and grow their enterprises. State support for community development finance institutions that support small business development in underserved communities has declined, direct investments in main street revitalization in small towns and cities, and rural economic development and infrastructure have also been significantly restricted in recent years. Meanwhile, North Carolina has failed to pursue many of the best practices in other states that take the best research and development to scale, promote innovative community economic development planning locally through targetted grants or most basically to sufficiently support the best business ideas in local communities that can achieve more inclusive economies. At the same time, public investments that are the foundation of a quality life—investments in good quality schools, parks and recreation—have eroded in our state putting at risk key foundations of entrepreneurship and innovation.
This new research in the report uses improved data to better inform our understanding of which businesses create jobs, and where they create them – calling into serious question the value of large-scale tax cuts and the various other tax breaks states typically offer businesses to move. Among the facts that counter ineffective tax-cut strategies:
- About 87 percent of private-sector job creation from 1995 to 2013 in the median state was “home grown.” The job creation came from startups, the expansion of employment at existing establishments, and the creation of new in-state locations by businesses already headquartered in the state.
- Large income tax cuts that a number of states have enacted or are proposing are especially poorly suited to helping startups and other rapidly growing firms, in part because these businesses often have little income in their early years.
- The most commonly cited reason among entrepreneurs for starting their companies where they did was that it was where they lived at the time. Eighty percent of these entrepreneurs lived in the city where they started their companies for at least two years prior to starting their business. A survey by Endeavor Insight consulting firm concluded that founders of fast-growing companies decide where to live based on personal connections, the talent of the local workforce, and quality-of-life factors. Only five percent of these successful entrepreneurs even mentioned taxes as a reason why they founded their companies where they did.
- To promote and assist job-generating entrepreneurship, states would be wise to invest in schools and colleges, improving workers’ skills, and maintaining communities that are attractive to residents who want to start a business. Successful entrepreneurs report these factors were key to where they founded their companies.
Bottom-line: Homegrown startups and fast-growing firms already in the state are much more important sources of job creation. Public investments that help build a skilled workforce and improve the quality of life for local residents are better bets for supporting real economic progress.