Job creation financial incentives: An outdated strategy

New evidence finds that public investments that help build a skilled workforce and improve the quality of life for local residents are more likely to create jobs and build a strong economy than tax cuts and attempts to lure businesses with financial incentives.

In State Job Creation Strategies Often Off Base, a new report from the Center on Budget and Policy Priorities, Senior Fellow Michael Mazerov and Michael Leachman, Director of State Fiscal Research, show that the vast majority of jobs are created by businesses that start up or are already present in a state.

They conclude that “many state policymakers pursue economic development strategies that are bound to fail” because they ignore this fundamental reality about job creation. When states offer financial incentives, they divert resources needed to help home-grown startups and young, fast-growing companies deliver maximum job growth and to build a climate that supports their growth with public investments in schools, transportation, and thriving communities.

In the past, a lack of useful data limited research about which kinds of firms create jobs. Now the federal government has developed databases that track over time the job-creation record of specific businesses of various sizes and ages while accounting for ownership changes. The U.S. Census Bureau has developed two such “longitudinal” databases. The U.S. Labor Department has developed one as well, and a private company using the Dun & Bradstreet business registry has created another.

Research using these data provides a new understanding about which businesses create jobs, and where they create them–calling into question the value of tax cuts and other tax financial incentives that states offer businesses to move in or stay. Among the facts that counter the financial incentives strategies:

• About 87 percent of 1995-2013 private-sector job creation in the median state was “home grown.” It came from startups, the expansion of employment at existing establishments, and the creation of new in-state locations by businesses already headquartered in the state.
• Jobs that move into one state from another typically represent only 1 to 4 percent of total job creation each year.
• The most commonly cited reason among entrepreneurs for starting their companies where they did was that it was where they lived at the time; a survey by Endeavor Insight concluded that founders of fast-growing companies decide where to live based on personal connections, the talent of the local workforce, and quality-of-life factors. Only 5 percent of these successful entrepreneurs even mentioned taxes as a reason why they founded their companies where they did.
• To promote and assist job-generating entrepreneurship, states would be wise to invest in schools and colleges, improving workers’ skills, and maintaining communities that are attractive to residents who want to start a business. Successful entrepreneurs report these factors were key to where they founded their companies.

The report notes that state and local governments are experimenting with various ways to boost the number and success rates of startups and young, fast-growing firms in an effort to determine which strategies work best. In the meantime, the report’s authors encourage policymakers to reject tax cuts and business financial incentives, and to reconsider those already enacted.