More Evidence That You Can’t Lure Entrepreneurs With Tax Cuts

February 14, 2014 at 11:42 am

Cutting state taxes to attract entrepreneurs is likely futile at best and self-defeating at worst, a new survey of founders of some of the country’s fastest-growing companies suggests.  The study, which is consistent with other research, should be required reading for state policymakers — especially those in Michigan, Missouri, Nebraska, Ohio, Oklahoma, South Carolina, and Wisconsin who are pushing for large income tax cuts.

The 150 executives surveyed by Endeavor Insight, a research firm that examines how entrepreneurs contribute to job creation and long-term economic growth, said a skilled workforce and high quality of life were the main reasons why they founded their companies where they did; taxes weren’t a significant factor.  This suggests that states that cut taxes and then address the revenue loss by letting their schools, parks, roads, and public safety deteriorate will become less attractive to the kinds of people who found high-growth companies.  (Hat tip to urbanologist Richard Florida for calling attention to the study.)

As I wrote last year on why studies show state income tax cuts aren’t an effective way to boost small-business job creation, “Nascent entrepreneurs are not particularly mobile.  Rather, they tend to create their businesses where they are, where they are familiar with local market conditions and have ties to local sources of finance, key employees, and other essential business inputs.”

I also argued that state tax cuts could be counterproductive, impairing states’ ability to provide high-quality services that make a state a place where highly skilled people want to live.

The new survey provides further evidence for these arguments.  It found that:

  • “The most common reason cited by entrepreneurs for launching their business in a given city was that it was where they lived at the time.  The entrepreneurs who cited this reason usually mentioned their personal connections to their city or specific quality of life factors, such as access to nature or local cultural attractions.”
  • “31% of founders cited access to talent as a factor in their decision on where to launch their company. . . .  A number of founders also highlighted the link between the ability to attract talented employees and a city’s quality of life.”
  • “Only 5% of entrepreneurs cited low tax rates as a factor in deciding where to launch their company” and only 2% mentioned “business-friendly regulations” and other government policies.  The report’s authors concluded, “We believe that the lack of discussion of these factors indicates that marginal differences in these areas at the state or municipal level have little influence on great entrepreneurs’ decision-making processes.”

Kansas, North Carolina, and Ohio have cut personal income taxes significantly in the last two years, and in each case the governor argued that it would give a big boost to creating or attracting new firms.  This new study provides more compelling evidence that that’s the wrong approach.  Let’s hope other states don’t start down the same dead-end path.

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More About Michael Mazerov

Michael Mazerov

Mazerov joined the Center staff in January, 1998. He is a Senior Fellow with the Center's State Fiscal Project.

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3 Comments Add Yours ↓

Comments are listed in reverse chronological order.

  1. Will #

    The article assumes that policy makers and tax cuts are exclusively targeting entrepreneurs. Just because a state is not attracting growing businesses does not mean that it is not attracting jobs. Of the nine states mentioned in the article, seven have large metropolitan areas that encompass portions of two or more states.

    The tax-cut border war that ensues in these situations is indeed effective at attracting jobs, although maybe not growing businesses. In the Kansas City Metro Area for example, between 2011 and 2013 J.P. Morgan Retirement Plan Services, AMC Headquarters, Applebee’s Headquarters, and all crossed the border from Missouri to Kansas or vice versa. These companies combine for over 2,500 jobs in the Kansas City Metro Area, and each received substantial tax benefits and incentives – from the respective municipal or state governments – that “were non-factors” in their decisions to move.

    Corporate leaders from these areas are less susceptible to the idea of lower taxes crippling the service infrastructure because they can live across the border, reaping the benefits of the higher taxes, while the company fiscally reaps the benefits of the lower tax rate, all the while enjoying less than an hour commute across the border.

    Most of the states listed in this article are fighting to keep and attract jobs over the border. The nature of these dual-state Metros has proven this “wrong approach” to be effective and situationally more than a “dead end.”

  2. 2

    Recent research by Kenyon, Langley, and Paquin, presented in the Boston Fed’s Communities & Banking magazine — — adds to the discussion by showing how counterproductive it can be to give tax breaks to companies that would have settled in the community anyway.

  3. Francis Sheridan #

    I want to commend Michael Mazerov for his recent article titled More Evidence That You Can’t Lure Entrepreneurs With Tax Cuts. I’d also like to add some historical ballast.

    The sub-discipline of modern geography called industrial location seeks to answer why firms locate where they do, why they quit, choose to expand or limit production, hire certain people, etc., at or away from certain locations While the Endeavor Insight study merits discussion, your readers should know that economic geographers reached these same conclusions decades ago, and the results have never wavered.

    Tax cuts to attract industry have long been self-defeating. Corporate leaders want to live in jurisdictions with clean air and water, strong public schools graduating educated young people, and good public services including of course transportation systems. Schools, transportation, and environmental protection—all largely a function of public sector activities.

    I encourage Mr. Mazerov and others interested in this topic to investigate the significant body of scholarly research in industrial location.

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