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

The news that Elon Musk is contemplating a $5 billion battery factory for his Tesla venture has set off a feeding frenzy among states hoping to be considered for the facility. Juicy tax cuts will undoubtedly be part of the package designed to lure Mr. Musk and thereby out-sell competing states.

The problem with all of this well-intentioned activity is that it doesnt work. As the following article explains, entrepreneurs are influenced by a host of potential considerations when they contemplate where to start a business. Unfortunately for all the public officials who think they have some sort of competitive secret sauce, tax policy is rarely one of the ingredients that matters as the following article explains.

That we remain so wedded to this approach is probably more a function of frustration rather than utility: public officials need to demonstrate that they've done something to attract jobs and they just dont have a lot of levers to push. Taxes are one area where they can actually wield some power. However, it may well be counterproductive.

The reason is that the sorts of things entrepreneurs do care about include access to a well trained workforce, which means investment in education; a functional infrastructure which requires investment in public works and attractive places to live for their workers and themselves, which means investment in public safety, the arts, entertainment and other intangibles that influence decision-makers. In fact, the data show that where one was born or currently lives probably has more of an impact on where a business is started than any other factor, especially if the entrepreneur likes where he or she lives and wants to continue living there.

It is conceivable that this will one day sink in. But we do not advise counting on it. JL

Michael Mazerov comments in the Off the Charts blog:

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.
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.