Recent Research: State Taxes Don’t Matter for Entrepreneurship

Imagine you're going into business for yourself. You will become an entrepreneur. Do you think you would stop to consider if you should relocate to a state with lower or even higher taxes before embarking on this venture?  Probably not.

 

At least that is a way to read the conclusions of a recent research paper published by the Small Business Administration’s Office of Advocacy. The major conclusion of State Tax Policy and Entrepreneurial Activity, prepared by Donald Bruce of the University of Tennessee in Knoxville and John Deskins of Creighton University in Omaha, finds “state tax policy, including both tax rates and the type of taxes in a state’s portfolio, has only a modest effect on aggregate state entrepreneurship rates.”

 

And that effect, albeit modest, is not always what one would expect. For instance, the authors found states with higher sales tax rates tend to have higher entrepreneurship rates. Top marginal tax rates on individual and corporate income do not have statistically significant effects on state entrepreneurship rates, nor does the composition of state tax portfolios (defined as the type of taxes imposed and what share each tax represents of the total state tax burden).

 

Bruce and Deskins use a variety of state-level data for all 50 states over the period 1989-2001, measuring entrepreneurship by the number of Schedule C filers in a state and the share of all non-farm employees who are self-employed.

 

The only variables found to even slightly reduce a state’s share of the national entrepreneurial stock were the higher top tax rates on individual income and the existence of state-level inheritance or gift taxes.

 

The SBA paper concludes state tax policymakers should not attempt to target tax breaks to small businesses but rather “should focus on traditional tax reforms involving lower tax rates, broader tax bases and simpler tax systems that will create a more productive tax environment for small businesses, large businesses and individuals alike."

 

Links to this paper and more than 4,500 additional TBED-related research reports, strategic plans and other papers can be found at the Tech-based Economic Development (TBED) Resource Center, jointly developed by the Technology Administration and SSTI, at http://www.tbedresourcecenter.org/.

 

State Tax Policy and Entrepreneurial Activity is available at: http://www.sba.gov/advo/research/rs284tot.pdf