The story behind state business incentives

October 4, 2013

Louise Story of the New York Times made an epic journalism effort late last year when she documented the level of state business incentives made to corporate entities. The team arrived at the massive number of $80 billion per year of state and local inducements that go to private firms. From their reporting:

A Times investigation has examined and tallied thousands of local incentives granted nationwide and has found that states, counties and cities are giving up more than $80 billion each year to companies. The beneficiaries come from virtually every corner of the corporate world, encompassing oil and coal conglomerates, technology and entertainment companies, banks and big-box retail chains.

State tax collections totaled $794 billion in 2012. So the $80 billion figure would equal about 10 percent of state tax collections. Does spending 10 percent of state revenues spur economic activity? If it does, it could be a bargain. From the Times again:

A full accounting, The Times discovered, is not possible because the incentives are granted by thousands of government agencies and officials, and many do not know the value of all their awards. Nor do they know if the money was worth it because they rarely track how many jobs are created. Even where officials do track incentives, they acknowledge that it is impossible to know whether the jobs would have been created without the aid.

After the series ran, Kansas Senator Jay Elmer, who was 2012 chair of the Council of State Governments, led a working group of state officials to look at how incentives fit into a larger discussion of economic development. Key findings for the group included:

  • State officials don’t have enough information to determine the value of the incentives
  • Reliable evaluations of existing programs are not available to policymakers
  • Incentives for relocation (especially within a state) usually add nothing to the economy and can erode the tax base
  • Often the legislative and executives branches of state government are not coordinating their efforts

It’s obvious that the conversations have just begun, but it’s a worthwhile effort. Then there are the headline-grabbers likeTexas Governor Rick Perry. Bloomberg reports:

Texas governor Rick Perry, working with a group of closely allied business leaders, has raised more than $2 million to finance his travels to lure jobs to texas. So far, he hasn’t brought one back. Starting with a four-day trip to California in February, Perry has traveled to Connecticut, Illinois, Maryland, Missouri and New York to urge businesses and residents to move. Texas added more than 30 percent of the nation’s new jobs over the past decade because it doesn’t tax personal or corporate income and avoids excessive regulation and frivolous lawsuits, Perry tells broadcast audiences.

If I could, I would urge state officials to focus their efforts on recruiting foreign manufacturers to their states. Many do that already, of course, but maybe it could be done in a more coordinated fashion with a spirit of cooperation rather than competition. His attack on other states is unnecessarily adversarial. Every state has unique economic, educational, workforce and energy resources and must be promoted on their individual strengths. Texas is a strong state but it’s not suitable for everyone.

The work of Story and the New York Times has hopefully spurred an examination of states’ tax and financial incentives. $80 billion dollars a year is a lot of money and the cost benefit analysis has yet to be done. Throwing tax dollars at private companies may be economically justified. But as budgets tighten, programs will have to show their worth. Proving the creation of new jobs should be an easy metric to develop.

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It has been reported that Puerto Rico’s economy has been in decline for several years, hurt by tax breaks that attracted U.S. companies for decades but ended in 2006. As of August, the unemployment rate was 13.9%, higher than any U.S. state.

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