Are Entrepreneurs a Better Gov’t Investment Than Corporations?

“Hey Cupcake,” a popular Austin startup (Photo by Evan Bench via Flickr)

Cities looking to spur economic growth should reconsider those tax breaks and subsidies intended to lure out-of-state corporations, and invest in local entrepreneurs instead, a new report suggests.

State Job Creation Strategies Often Off Base,” a report by Michael Mazerov and Michael Leachman with the Center on Budget and Policy Priorities, indicates that only 1 to 4 percent of total job creation each year stems from relocated out-of-state firms. About 87 percent of private-sector jobs created between 1995 and 2013 stemmed from in-state businesses, created by startups, entrepreneurs or the expansion of employment at existing companies.

Though the report focuses on state policies, it’s easy to see what metro areas can learn from its findings. Cities are hotbeds of entrepreneurship, but they’re still offering millions of dollars in subsidies and tax breaks to lure large corporations — see Boston’s recent deal with GE — even when those corporations create relatively few positions.

Startups, on the other hand, have much higher rates of job growth than older firms, which actually tend to experience an annual net loss of positions. Even accounting for the fact that more than half of all startups fail in the first five years, every year’s crop of surviving businesses will collectively create 2.4 million jobs at the end of that five-year period, according to the report.

The report claims that individual income tax cuts intended to help small businesses are misguided, too. Because most startups are unlikely to see much profit for the first few years while they invest in equipment, marketing and product development, income tax cuts do relatively little to help the greatest job creators.

If policymakers saved those millions in subsidies and uncollected taxes, they could instead invest in schools, universities, job-training and other programs that will help new business founders survive the first few years.

“Policymakers should reject major income tax cuts and new corporate relocation subsidies, and reconsider those already enacted,” argue the report’s authors. “Public investments that help build a skilled workforce and improve the quality of life for local residents are better bets ― successful entrepreneurs report these factors are key to where they founded their companies.”

The report cites a 2014 study of 150 founders of some of the United States’ fastest-growing companies, which found that only 5 percent of entrepreneurs cited low tax rates as a factor in deciding where to locate.

The majority chose to start their businesses based on where they lived at the time. When asked why they lived where they did, founders cited quality of life factors like access to recreation or cultural institutions. Most founders had lived in their cities for at least two years before starting their companies.

Jen Kinney is a freelance writer and documentary photographer. Her work has also appeared in Satellite Magazine, High Country News online, and the Anchorage Press. See her work at jakinney.com.

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Tags: economic developmentjobsstartups