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.