Startup Tax Holidays: The Business-Friendly Policy That Pays for Itself

It’s the question on every policymaker’s mind these days: How do we get entrepreneurs to start businesses in our backyard?

Every state, county and city is different, so there’s no magical, one-size-fits-all formula for startup success. But there are some tactics that are broadly applicable to a wide range of situations. One particularly ascendant approach is head-slappingly simple: tax holidays for nascent startups. Done properly, such holidays are highly cost-effective. And they’re great for putting hitherto-unknown startup hubs on the map. Here’s a look at what tax holidays for early-stage companies entail — and how local economies can benefit.

A Clear Competitive Opportunity

State and federal tax laws often favor established firms — a condition often referred to, invariably in a negative sense, as “corporate welfare.”

Despite increasing barriers to entry in many industries, it’s far less common for early-stage companies to get favorable financial treatment. Jurisdictions that buck the trend and favor young, disruptive businesses therefore carve out a slice of the competitive pie for themselves.

One Way to Keep Up With the Joneses

Although economic development isn’t a zero-sum game in which one state’s loss is another’s gain, it’s impossible to ignore the powerful competitive pressures exerted by an increasingly globalized economy. Single jurisdictions that say “enough is enough” and refuse to offer business-friendly incentives might achieve some measure of moral victory, but the cost — measured in lost taxes, fewer jobs and shrinking cities — certainly isn’t worth it.

With this in mind, it’s critical for state incentives to stay ahead of the curve. Tax holidays for young businesses as well as companies that pledge to relocate from out of state have been proven to boost economic performance and lure dynamic firms.

A Revenue-Neutral Proposal

These days, “but how much will it cost?” is an increasingly common political refrain — a latter-day incarnation of “it can’t be done.”

Taxpayers should thank their political leaders for subjecting public-spending and business-incentive proposals to close scrutiny, particularly when public monies are involved. They should also be grateful for leaders who understand the value of public investments and aren’t afraid to make tough choices that take a long view of development and prosperity. That’s why the concept of tax holidays for new or relocated businesses is so attractive: According to economists, the upfront costs of the incentives is often offset — and sometimes surpassed — by income and sales tax receipts attributable to newly created jobs.

Who’s Leading By Example?

The concept of business-friendly tax breaks isn’t new. In fact, incentives for entrepreneurs and small business owners have been around almost as long as the tax code itself. But state and city governments have only recently discovered the power of tax breaks aimed specifically at nascent businesses that pledge to incorporate or headquarter in a particular region. Not surprisingly, some places are farther down this path than others.

Take Massachusetts, long recognized as a hub for high-tech startup activity. Local luminary Chip Flowers proposed an innovative and cost-effective strategy in a recent op-ed. His plan, likely set to be fleshed out in the coming months and years, outlines a sensible set of criteria for identifying and supporting promising firms that deserve public investment.

Should Flowers’ proposal prove successful — and, by all indications, it’s a fundamentally sound plan with tremendous potential — it’s fair to bet that other states will follow suit. And that won’t simply be a victory for early-adopter jurisdictions. It’ll be a triumph for the American economy.