To create jobs and build strong economies, states should focus on producing more home-grown entrepreneurs and on helping startups and young, fast-growing firms already in their state to grow ― not on cutting taxes and trying to lure businesses from other states. That’s the conclusion from a new analysis of data about which businesses create jobs and where they create them, as we explain in a new paper.
The data show that:
State economic development policies that ignore these fundamental realities about job creation are bound to fail. A good example is the deep income tax cuts that many states have enacted or are proposing. Such tax cuts are largely irrelevant to owners of young, fast-growing firms because they generally have little taxable income. And, tax cuts take money away from schools, universities, and other public investments essential to producing the talented workforce that entrepreneurs need. Many policymakers also continue to focus their efforts heavily on tax breaks designed to lure companies from other states — even though startups and young, fast-growing firms already in the state are much more important sources of job creation.
Many states and localities are experimenting with various ways to boost the number and success rates of startups and young, fast-growing firms, and it’s too soon to know which strategies will work best. In the meantime, policymakers should reject major income tax cuts and new corporate relocation subsidies, and reconsider those already enacted. Public investments that help build a skilled workforce and improve the quality of life for local residents are better bets.