As federal and state governments outline plans for reopening the economy, lawmakers will have to grapple with the challenge of getting tens of millions of Americans back to work as quickly as possible.
The economic damage has been inflicted on both the employer and worker sides of the labor market. A mass of businesses have filed for bankruptcy as a result of the lockdown, with the American Bankruptcy Institute finding a 48 percent increase in commercial Chapter 11 filings in May compared to last year.
And many laid off workers will not be able to return to their former jobs. As many as 25 percent of jobs may never come back, Joseph Brusuelas, chief economist at consulting firm RSM, recently told Politico.
Part of the problem is that even businesses that survive the downturn are going to be wary about expanding to fill the market gaps left by their defunct peers. Small businesses, which are naturally less risk-tolerant than their large counterparts and have access to fewer resources, will be especially cautious about growth.
That’s why simply “reopening the economy” won’t put everyone back to work. We also need a strategy for incentivizing existing small businesses to swiftly scale up and make room for rehiring the unemployed.
U.S. policymakers need new tools for revitalizing entrepreneurship and leveraging its potent job-creating abilities. To that end, the Progressive Policy Institute (PPI) has proposed a new Startup Tax Credit that incentivizes entrepreneurs to quickly increase employment at their small companies, giving even existing companies a startup-like boost.
Modeled on the Earned Income Tax Credit, the Startup Tax Credit would be a refundable tax credit tied to the number of employees and payroll at a small business.
The credit could be used to offset payroll, income or other taxes. Like the EITC, the credit would rise as those metrics increase to encourage companies to grow and add workers. The credit would phase out as companies pass a certain size threshold.
Importantly, the Startup Tax Credit would encourage businesses to continue growing rather than getting caught in the scale-up trap unintentionally presented by tax and regulatory carveouts. Small businesses are often exempted from providing benefits like healthcare, unpaid leave and the federal minimum wage.
These abatements provide relief to startups as long as they stay below the applicable thresholds, but the threat of losing them can make entrepreneurs think twice before expanding. The Startup Tax Credit would mitigate the scale-up pitfall by encouraging startups to grow throughout the stages of their business until they are no longer considered small.
Similar tax credits and programs have been adopted or proposed in the past. For example, Nebraska’s Advantage Microenterprise Tax Credit allows microbusiness owners to take a refundable income tax credit equal to 20 percent of the microbusiness’ new investment or employment, up to $10,000 in a lifetime.
Prosperity Now’s (formerly CFED) proposed New Entrepreneur Tax Credit would provide a refundable credit to new startups during the first few years of operation when they face unusual startup costs.
And the New Business Preservation Act, which PPI has endorsed, would allocate an initial $2 billion for participating states to invest alongside private venture capital companies in new businesses outside of the Silicon Valley, New York and Boston venture capital hubs.
To be sure, the Startup Tax Credit, like the EITC, would be costly. But to alleviate budget concerns, the credit could be capped in terms of the annual amount claimed, the annual amount of funding available, or the amount claimed over a lifetime. Businesses could also be required to share a business plan that indicates plans for future growth.
Moreover, the Startup Tax Credit addresses a long-standing problem. Even before the pandemic struck, employment at “young” businesses was lagging by historical standards. A PPI analysis of Census Bureau data on business dynamics over time reveals “young” businesses — between six and 10 years old — accounted for 8 percent of total U.S. employment in 2016. That’s a 4 percent decrease compared to 1996. The number of firms aged 6 to 10 years has also declined by more than 20,000 since.
Encouraging small businesses to think like growth-minded startups is more important now than ever, as our economy will need these businesses to absorb potentially millions of workers who can’t return to their former employers that have been permanently shuttered by COVID-19.
The Startup Tax Credit would spur businesses to quickly scale up during the coming recovery and ensure that the unintended consequences of well-meaning efforts to support entrepreneurship don’t stunt their growth.