When a big company looks to move, states and cities often compete with tax breaks to lure it, hoping it will boost the local economy by adding jobs. But what if some of those incentives went to startups instead? That's the goal of a new proposal from Brookings Institution's Hamilton Project in conjunction with the Duke Fuqua School of Business.
Examples of how business incentives work now come from all corners of the U.S. New Jersey was among 20 finalists for Amazon's second headquarters. It offered up to $7 billion in tax incentives as part of its bid (and it ). Or take Wisconsin, which has lured Taiwanese technology giant Foxconn to build a plant in the state with incentives up to $4.5 billion. And three years ago, GE (GE) got breaks from Massachusetts and Boston totaling about $145 million to move offices for the headquarters alone.
However, it's difficult to tell if the current system works. In 23 states, such incentives aren't monitored well or at all once they're allocated, a Pew Research study last year found, so it's difficult to determine the results.
Yet those types of incentives have tripled since 1990, reaching $45 billion in 2015 from cities, towns and counties that went to mostly large companies, according to research from the Hamilton Project and the Duke Fuqua School of Business, which have proposed shifting at least $5 billion of that money to startups.
At the same time, the rate of new startups has slowed since peak creation in 1977. Startups generate 20 percent of all new jobs, even though they make up just 10 percent of U.S. firms, according to the report. Startup jobs are also more dynamic, with the most successful firms expanding by more than 25 percent each year. They also tend to pay higher wages, which makes for an economy that grows faster, Jay Shambaugh, director of the Hamilton Project, said in an interview.
"People think of the U.S. as this very dynamic economy, and in many ways it is. You see all those entrepreneurs on 'Shark Tank,' or there's a startup in Silicon Valley that's disrupting everything," Shambaugh said. "But when you add it up across the country, startup rates are down and have been for decades."
So the Hamilton Project is proposing a federal fund -- $5 billion in its first year -- called the Main Street Fund, monitored via the U.S. Department of Commerce. States would apply the money to programs for startups via research, training, incubator and other programs for entrepreneurs. The Commerce Department would consider applications through a formula that includes population, demographics and the local economic data.
States that cut incentives for big firms to support entrepreneurs would get more as the Main Street Fund builds its program. Funds will be cut if states give new incentives to big firms that otherwise could have been used to support startups.
"If you were calling for a large-scale program to massively try to stimulate the economy and cause huge amounts of growth, this is saying what you need are these high-growth, high-productivity startups," Shambaugh said. "It's so important that it has sustainable growth over time. It's about productivity growth and wage growth. It's not purely a story about employment."
The idea is to "set up the ecosystem in an environment that makes it easier, in some sense, to look like the America people have in their imagination," Shambaugh said. "On the one hand you have entrepreneurs that are breaking in and starting up and doing all these great things -- and there are some of those people are out there. But we have made it too hard for them by giving all incentives to their preexisting competitors."
The proposal was discussed as part of a larger forum last week at the Brookings Institution in Washington via webcast.