“Business Friendly” in a New Era of Economic Development

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There have been several reports recently connecting local and state tax environments to small business and entrepreneurial growth. In Business Tax Index 2012, the Small Business and Entrepreneurship Council created state scores based on 18 different tax measures that indicate the cost of their tax system on entrepreneurs and small businesses. Similarly, the Tax Foundation and KPMG published a slightly more nuanced analysis, Location Matters: A Comparative Analysis of State Tax Costs on Business.

There is no denying that tax systems impact business location decisions and their ability to grow, but can or should we still be determining a place’s “business friendliness” based entirely on tax burdens? This paradigm dominated economic development policy during the era of smokestack chasing, but is it appropriate when instead of trying to lure the next big company, a community is seeking to support existing small businesses and grow new ones from within?  It just seems like we’re having the wrong conversation.

Bloomberg BusinessWeek analysis reveals, in fact, that small businesses do not choose low-tax states.  States with the lowest tax burdens are not those with the most new business starts. Entrepreneurs generally do not relocate to start their business, they do it locally (another reason small business development and entrepreneurial support are favorable strategies to jumpstart local economies).

So, what, then, does “business friendly” mean for small businesses, entrepreneurs and start-ups?  Experts suggest that there is no one defining characteristic of a city or state supportive of small and new businesses.  Instead, it is a collection of elements comprising an entrepreneurial “eco system” — universities, large and small businesses and their leadership, ease of doing business, entrepreneurial support programs, workforce skills, financing, and probably a bit of luck.

There have been recent conversations, particularly on Capitol Hill, about what government should be doing to support this eco system, suggesting new incentives to spur small business growth. But do we need more incentives? According to NLC’s recently released a toolkit on Supporting Small Businesses and Entrepreneurs, the most effective avenues of support from governments, particularly local governments, are not incentives, but tackling efforts within city hall and partnering with external stakeholders. This can include helping to prioritize issues and outwardly demonstrating that entrepreneurs and small businesses are important to a community to reviewing and improving permitting and regulatory functions to bringing together service providers and business groups to help identify gaps, encourage collaboration and be a centralized information source.

Changing the conversation about how to encourage local economic growth starts with an appreciation for the new drivers of this growth, thinking fresh about economic development, and leveraging existing capacities to support the entrepreneurial eco system.