Delaware National

The Problem of Corporate Tax Breaks

They basically don’t do the job that politicians and corporations tell us they do.  This is the conclusion of a research paper released from Upjohn earlier this year. (PDF and long).  The basic takeaway?    After collecting and analyzing data from 1990 to 2015 from 33 states, they found that the average amount of business incentives tripled over that period, increasing from 9% of business taxes to 30%.  There was not an accompanying increase in job or business creation — these incentives were mostly ineffective and the governments providing them would have achieved the results they did get 94 percent of the time. if there were no incentives.

Since then, there have been multiple stories lamenting these tax breaks and subsidies — from Governing, which notes that these kind of taxpayer fund transfer to businesses is pretty old business and that it has never been good business.

An assessment of Texas’s incentive program:

Texas ranked slightly below average in its reliance on incentives, relative to the size of its economy, with about $3.1 billion in cumulative annual value. For comparison, Louisiana’s incentives were valued at $1.45 billion and New Mexico’s incentives were valued at $511 million, but both of those states have much smaller economies than Texas so their relative use of incentives was significantly higher in Bartik’s study.

He said such patterns are indicative of the limits of incentives as they’re currently deployed by most state and local governments, as well as evidence that they aren’t “a miracle elixir” for economic development.

Texas has been a top state for job creation since the recession, although it recently has been hurt by the downturn in the oil-and-gas sector. Still, the state’s unemployment rate averaged 4.6 percent in 2016, according to the Bureau of Labor Statistics, compared to a national average of 4.9 percent last year and 6.1 percent in Louisiana.

“Louisiana should be doing much better than Texas, if (incentives) was all that mattered,” Bartik said.

For New York:

The study, by the nonpartisan W.E. Upjohn Institute for Employment Research, flagged the film and TV production credit as the least effective subsidy of all.

As the Empire Center’s E.J. McMahon recently noted, the new state budget extends this credit to one of America’s most well-heeled (and politically wired) industries by $420 million a year for three years after it was originally set to expire.

But even subsidies to other industries, the Upjohn report concludes, “are not cost-effective,” with “no statistically significant effects.”

Four years ago, the state commission was even more emphatic: It found “no conclusive evidence that business-tax incentives actually increase economic gains . . . above and beyond what would have been attained” without them.

Then there’s Kansas who went the Full Monty on tax cuts resulting in huge underperformance of their economy, a lawsuit to force the government to fund schools and a coup staged by GOP moderates to reverse course.

And even though there is plenty of evidence to note that most large businesses use these incentives to sweeten a deal for a site they’ve already chosen, states continue to work at throwing money at businesses at the expense of adequate funding for their schools, public transportation, and roads.   Which is crazy, since you’d think you would want to spruce up these things in order to be attractive to new firms in the first place.  Make YOUR state the place to be, so that business will choose to be there.

From the Governing article above, the City of Richmond has a different approach:

In 2014, then-Mayor Dwight C. Jones created the Office of Community Wealth Building, which was charged with reducing overall poverty by 40 percent and child poverty by 50 percent by 2030. The program’s integrated strategy focuses on expanded workforce development, targeted job creation, improved educational outcomes and development of a regional transportation system.

Unlike a lot of innovative government programs, the Office of Community Wealth Building has not only survived a change of administration but has been strengthened and expanded. The current mayor, Levar Stoney, lauded the program during his campaign. A quarter of Richmond’s residents live below the federal poverty level and, as Stoney says, “You can’t be a AAA bond-rated city without reducing poverty.”

This article does note that they still use some incentives, but look at what Richmond is doing.  They are focusing on making investments in themselves that improve the talent pool, improve infrastructure and quality of life.  So that even if that company relocates to your area and decides to leave, the improved talent pool, the improved infrastructure, and quality of life don’t go away.  They are there for your remaining businesses to take advantage of and grow.  They are there for your Econ Developers to continue to market.   Throwing money at businesses by governments is always something of a game.

Throwing money at businesses by governments is always something of a game.  No doubt that states and cities think they need to do this to be competitive.  It is increasingly clear that the only real upside in this deal goes to the business getting taxpayer funds.  And as the experience of the researcher of the Upjohn paper notes, it was tough to get the performance data that he did get.  Because states don’t much like revealing either the deals they make or let people actually assess how well this pool of taxpayer money is actually working. It is time to expand what we think of as economic development to include workforce training, school improvements, infrastructure upgrades and other quality of life upgrades that will do the most to make us look like we are ready for business.

16 comments on “The Problem of Corporate Tax Breaks

  1. This is spot on for what I have been saying for a while. No one wants to live in a place that is a cultural, recreational and educational backwater even if the taxes are low. “Charlie, we’re going to relocate you and your family. Do you want to go to California or Alabama?”

    • cassandram

      And here, you want to make sure that people who come here will live here — not in PA or MD and commute in.

  2. dthompon3662

    Nice post!

  3. Corporate welfare never works, even if jobs are won or retained they tend to slip away with time. And when the tax breaks and giveaways deplete the treasury the state or city has no choice but to stick it to the average man. Sound familiar?

    • cassandram

      Of course it does. That is the entire framework of the whole tax cuts scheme. Corporations and wealthy people pay less while the bill is paid by working and middle class people. You can see that writ large in the last Delaware budget.

  4. Wow, finally I agree with this topic. Markell for one, gave money to Fisker, but failed to provide clauses for not meeting their quotas. The same thing with Bloom Energy. Currently, out of 46 job openings, there are 7 openings in Delaware, the rest are in California and India. On top of that, Who is holding Bloom’s feet to the fire…..NO ONE!

    Who is left holding the bag, us!

    • Remember, this is what happens when people tell pollsters that “jobs” are their No. 1 priority. In a market-worshiping economy like ours, jobs are not the government’s responsibility. It’s like going to the auto mechanic and telling him your elbow hurts whenever you shift gears, and asking him to fix your elbow.

      • I’ll be the first, WE found common ground. Now let’s have a Heineken.

        • Wish I could. Doctor told me to give up drinking and, for once, I listened.

    • Actually, with Bloom Energy’s DEDO handouts did come with a claw back that – with proof of compliance or no compliance with the terms for the grant/loan – comes due in a few weeks. Even Fisker had a few claw backs, IIRC. Whereas NCC tax payers did not get in on the deal. Fisker’s school taxes are outstanding and people are wondering if Harvey Hanna will be paying the RCSD what’s due when and if they purchase the property.

  5. cassandram

    So here’s another data point: Apple to Build Data Centers in Iowa”

    Now this is a company with more cash on hand than ALOT of countries. They are getting $200M in tax breaks from the state and local governments to produce about 50 FT jobs. There’s supposed to be $100M contributed by Apple to a local economic fund, but there’s no detail on what that is meant to be. They talk about this town being rural, which it might be, but it is basically exurban Des Moines.

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  8. Vlad Alyokhin

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