A major element of President Donald Trump’s plan to overhaul the federal tax code involves corporate tax-rate cuts that are supposed to lead to more business investment and hiring. But a bipartisan group of lawmakers that includes New Jersey’s Cory Booker is backing legislation that follows a different approach to economic growth by investing directly in the development of small businesses and startups.
A measure introduced earlier this month in both the U.S. Senate and the House of Representatives calls for $6 million in additional funding to go to the federal Small Business Administration to help maintain the agency’s Growth Accelerator Fund for another five years.
Started in 2014, the SBA program supports an annual competition in which small-business accelerators, incubators and other places that encourage entrepreneurism vie for financial prizes they can use to help support new small businesses and startups in their respective regions. Two small-business accelerators from New Jersey are among the program’s previous competition winners, according to the SBA.
In addition to providing more funding for the accelerator program, the proposed legislation also seeks to ensure the SBA is investing its resources in diverse communities where incomes aren’t already high. Booker (D-NJ) is sponsoring the legislation in the Senate, and in the House its backed by Reps. Lisa Blunt Rochester (D-Delaware) and Brian Fitzpatrick (R-Pennsylvania). The small-business accelerators have a proven record of generating new investment and venture capital, but more growth can occur by addressing economic gaps, the lawmakers said.
“Innovation is the secret sauce that has fueled the American economy since our country’s inception,” Booker said.
“Together we can plant the seeds of nationwide growth,” Fitzpatrick said.
Trump’s Tax Scheme
Under the proposed overhaul of the federal tax code that Trump is urging Congress to pass before the end of the year, the federal corporate-tax rate would be reduced from 35 percent to 20 percent. Trump’s tax proposal also calls for a new rate for companies whose owners don’t pay corporate taxes, but are instead taxed by the federal government as “pass-through” companies through personal income-tax rates. The theory behind both tax-policy changes is that the lower tax rates will indirectly lead to more economic growth by freeing up capital that the companies could then devote to more investment and hiring.
But under the legislation that’s being backed by Booker and the other lawmakers, the federal government would continue providing direct support to a growing number of small-business accelerators that have been established throughout the country to help nurture the growth of startup companies, particularly in the technology field.
The role that startups and young companies can play in driving economic growth was highlighted in a recent critique of New Jersey’s economy and economic-development tax-incentive programs that was released earlier this year by international management consultant McKinsey & Co. Citing U.S. Census data, the report showed that between 2004 and 2014 companies that were less than 10 years old experienced 17 percent growth in total employment, while companies that were at least 10 years old saw employment losses of roughly 5 percent.
“Few mature businesses grow faster than the overall economy, and large companies generally create relatively few new jobs, but young companies can double in size in a year or two and may be adding jobs for many years to keep up with growth,” the report said.
Incubators and innovation
McKinsey also highlighted the role that small-business incubators can play in helping drive the development of small companies, and encouraged New Jersey policymakers to do more to foster startups and innovation.
In all, there were an estimated 170 small-business accelerators located in the U.S. as of 2014, according to research conducted by the Brookings Institution. The accelerators help the small businesses grow by providing them with things like office space, mentoring, and access to financing.
According to the SBA, the accelerator program has provided funding to 138 business accelerators across the country and in Puerto Rico that support 5,000 companies and 20,000 employees. Those accelerator-supported companies also raised an estimated $1.5 billion in capital.
The SBA’s annual competition is judged by experts from the private and public sectors who have backgrounds in early-stage business investing, as well entrepreneurship, academia, and startups. Previous SBA prize winners from New Jersey include the Rutgers Food Innovation Center in Bridgeton, Cumberland County, and the Great Turning Advisors Social Business Accelerator in Randolph, Morris County.
The legislation backed by Booker and the other lawmakers would provide the SBA accelerator program with a total of $6 million over the next five years. It would also require the SBA to improve the program’s oversight and transparency.
The lawmakers, meanwhile, are also seeking through the bill to have the SBA put more of an emphasis on providing funding to accelerators that work with specific demographic groups, including women, veterans, minority and disabled entrepreneurs, and underserved geographic areas, including those located in rural areas. They point to the Brookings Institution research that determined while the number of incubators across the country expanded tenfold between 2008 and 2014, most of the growth occurred only in high-income regions.
“Unfortunately, capital and resources to support that innovation is increasingly only going to a small handful of cities,” Booker said. “Our bill would help address this problem by identifying and cultivating startup entrepreneurs in underserved areas and providing them with the support and resources they need to grow and succeed.”