A new paper from the Mercatus Center at George Mason University examines the effect of state government efforts to attract businesses. These incentives range from tax credits to sales tax reductions and despite their intention to create jobs, the policies often open the door for cronyism and a misallocation of resources. It is not surprising that a government making special deals to attract businesses rewards those with political connections at the expense of other businesses and the tax payer. That these special deals also fail to deliver on their promises only makes their continued use even more undesirable.
“In 2007, Apple received local and state subsidies for building a large facility in the city of Maiden, North Carolina. Generous tax breaks make the deal worth $370 million, assuming that Apple stays there for 30 years. [The facility] was estimated to hire 50 people; that is one job for every $7.4 million in subsidies.”
Michigan’s Capitol Confidential reports that a Michigan tax credit program historically has trouble meeting its job creation goals.
Of the 434 Michigan Economic Growth Authority (MEGA) credits approved for new jobs from 2005 to the end of the program in 2011, only 10 projects met or exceeded their estimated job counts. In other words, just 2.3 percent of MEGA projects met or exceeded expectations.
The News Telegram reports that Massachusetts Department of Housing and Community Development has awarded tax credits totaling $220,000 to local community development corporations.
The private nonprofit community groups will now offer the tax credits to potential donors and businesses as an inducement to fund CDC programs such as building affordable housing and providing job skills training.
Mike Flynn has a piece describing a $1.6 million tax credit awarded to Sony Corporation to move 50 jobs to New Jersey. From the article:
This is the latest chapter in the long drama of entertainment companies seeking state and local tax credits to underwrite the costs of production or overhead. It is a policy one could think of as “crony federalism.” One of the economic strengths of the federalist system is that states can compete against each other and attract businesses and citizens through sound tax, fiscal, and regulatory policy.
Economists have long pointed out that a low burden tax policy with no tax credits is preferable to a high burden, high tax credit environment. Through tax credits, governments can discriminate in favor of some industries – such as the entertainment industry. This leads to an economy that accommodates government whims as much as (or more than) consumer preferences. For instance, an economy that shifts a business location partly on the basis of a $1.6 million tax credit award.
Pennsylvania offers tax credits for research and development, and has hit its capped total – currently $55 million. This raises a question: should governments be providing tax credits for R&D? Why? And if so, what types of R&D? How does the state know that it’s supporting the most valuable research and development efforts for society? These are questions about consumer preferences – a question that government’s are typically ill-equipped to answer.
The Providence Journal reports that a property developer was awarded $2.5 million in tax credits to redevelop an office structure.
In addition to the state historic tax credits, Chace is seeking a property tax stabilization agreement with the city. A City Council committee will discuss a proposed 12-year stabilization agreement for the Kinsley Building later this month.
How much bread can $13 million buy? In New Jersey it will buy the entire bakery, after The New Jersey Economic Development Authority guaranteed an Italian bakery $13.5 million over 10 years under New Jersey’s “Grow NJ” tax credit program. The bakery, which was considering moving its operations to Pennsylvania, cannot be totally faulted for accepting the tax credit, as a rival bakery benefited from $9.1 million of tax-exempt bonds in 2008. In some sense this recent move can be seen as “leveling the playing field” between the two companies but it does not benefit the other bakeries in the state, or the taxpayers.
”Why is NJEDA financing competitors? And why should taxpayers have to shore up the hoagie-roll industry, anyway? Aren’t there banks in the state? NJEDA papers show that [the] grant, which depends on the bakery actually saving the promised jobs, fulfills state Grow NJ program requirements. And that the [rival’s] financing met federal tax exemption requirements”
Most states have tax incentives for film production, but these incentives don’t always pay off. From the USA Today:
“Policymakers think they are a little bit sexy and they can be messaged as a tax cut,” said Scott Drenkard, an economist with the Tax Foundation. “But it doesn’t comport with the economic evidence that these tax credits in particular don’t have really tangible benefits to them.”
Drenkard pointed to an analysis done last year by the Tax Foundation that found film tax incentives generate 30 cents in tax revenue for every dollar spent. “It’s a question of, do you want to use the tax code to subsidize some businesses at the expense of others, or use it for what it is meant to be used for, which is to collect revenue for government services?”
The Los Angeles Times reports that the FBI is looking into the activities of a lawmaker with regards to a tax credit proposal he made. From the article:
Calderon pushed to extend tax breaks to productions of less than $1 million. He and family members received a total of $10,800 in campaign contributions from an independent producer who could have benefited from the change Calderon advocated.
Despite a dubious track record, states continue to award tax incentives for job creation. Some of the latest tax credits awarded went to twelve companies in Ohio. The Cincinnati Business Courier reports:
The companies are expected to create 1,265 jobs across the state and more than $66.4 million in new payroll while providing $187.4 million in investments.