Center on Budget and Policy Priorities:  Cutting State Personal Income Taxes Won’t Help Small Businesses Create Jobs and May Harm State Economies, by Michael Mazerov:

There is almost nothing in economic theory or empirical research to
support an assertion that cutting state personal income taxes will have a
significant impact on the emergence, success, or job-creation
performance of small businesses.  The vast majority of any revenue
forgone from such tax cuts will flow to people who don’t own businesses,
and of the limited tax savings that does happen to flow to business
owners, the vast majority will be received by people with no intent or
authority to hire additional people.  State personal income tax cuts do
not increase the cash flow of most small businesses sufficiently to
finance the creation of new jobs, and, conversely, small businesses with
good growth prospects do not need to rely on their own cash flow to
finance expansion.

Neither economic theory nor empirical
research support the assertion that personal income tax cuts inherently
encourage increased work-effort on the part of small business owners
that could generate additional hiring as a side-effect.  Nor is there
any evidence that entrepreneurs on the cusp of starting their ventures
are likely to be attracted to a state merely because it cuts its
personal income taxes.  Perhaps most importantly, a very detailed and
careful empirical study commissioned by the U.S. Small Business
Administration concluded, in the words of the authors, that there is “no
evidence of an economically significant effect of state tax [policy]
portfolios on entrepreneurial activity. . . .” 

While there is
no compelling evidence that the large state income tax cuts promoted by a
number of governors would be a cost-effective means of encouraging
entrepreneurship, there is a significant risk that the cuts would
seriously impair the ability of these states to fund infrastructure,
education, public safety, and other services that are a critical
underpinning of a healthy state economy.  Policymakers should therefore
reject proposals for state personal income tax cuts as a means of
encouraging the birth and growth of small businesses and focus instead
on more targeted approaches to assisting these firms.