Are Tax Cuts the Way to Attract Start-ups?

Monday, February 24, 2014 at 11:06 AM by

Insights from a New Survey and the “Epic” Growth in Dane County

In recent years, many policymakers have set their sights on trying to attract entrepreneurs and new start-ups to their communities and states.  In some cases they have used that goal to justify tax cuts, which some lawmakers think will be an inducement for innovative entrepreneurs.  Scott Walker is among the Governors who are seeking to promote development of new businesses and employing tax cuts as a tactic to pursue that goal. 

But are tax cuts an effective strategy for attracting entrepreneurs and boosting the number of start-ups?  A new report adds to the evidence that reducing taxes is not what entrepreneurs are looking for, and is likely to be a counterproductive strategy.  And if we turn our attention to the Dane County economy,  the extremely dynamic growth of health care IT companies , led by the explosive growth of Epic, reinforces the conclusion that the playbook of conservative politicians pushing for lower taxes and reduced regulation is not what drives the growth of small businesses.

The new report was released a couple of weeks ago by Endeavor Insight – the research department of the non-profit Endeavor, which strives to foster and mentor “high-impact” entrepreneurs. Their report is based on surveys and interviews with 150 founders of some of the fastest-growing American companies.  Some of the report’s key findings include the following:

  • The top rated factor by far was access to talent, which was mentioned by nearly a third of those surveyed as a key factor in their decisions for where to live and work. Many specifically cited access to technically trained workers.
  • Similarly, many said they were drawn to places with cultural amenities and a strong quality of life, which will attract a larger talent pool.   
  • Two other key factors in the location choices of entrepreneurs are major transportation networks and proximity to customers and suppliers.
  • Very few said taxes were a factor.  In fact, only 5% of those surveyed mentioned low taxes.
  • A mere 2% named business-friendly regulation as a factor in their location decisions.

The report says the top business creators generally gravitate towards cities with at least a million residents in the metro area. Madison appears to be an exception in that regard, but it offers the amenities and vitality of many larger urban areas.

Another finding is that a city needs to be able to appeal to the young and the restless because entrepreneurs are highly mobile in the early phases of their careers, “following personal ties or certain lifestyle amenities while also seeking the right environment to launch their enterprises.”  However, the report says 80% of respondents had lived in their current city for at least two years before starting their companies, and once they launched their first company they rarely moved.

The report concludes:  “The magic formula for attracting and retaining the best entrepreneurs is this: a great place to live plus a talented pool of potential employees, and excellent access to customers and suppliers.”

I was reminded of the report’s findings when I read an article in the latest Isthmus about the tremendous boom in employment in Dane County from EPIC and the numerous health IT companies created in recent years by former EPIC employees. They are starting and expanding those businesses in the Madison area for all of the reasons cited by the entrepreneurs interviewed for the Endeavor report.  Our state and local taxes and spending contribute to the quality of life, the pool of talent, and the growth of well-paid jobs in the IT sector.    

Start-ups and other small businesses account for a large percentage of job growth, so it makes sense for state and local policymakers to want to assist them.  But some lawmakers have a bad habit of assuming that entrepreneurs want the same low tax, small government agenda advocated by people like the Koch brothers.  The Endeavor report and the health care IT growth in Dane County indicate that not only is that a mistaken assumption, it could also be a counterproductive way of trying to court new entrepreneurs and the well-paid jobs that those small businesses can generate.

Jon Peacock  

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