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August 23, 2007
Tax Incentives: Worthwhile Renewed Scrutiny or Worn-out Issue?
In an ongoing effort to attract economic development to areas in the U.S. and remain competitive, states offer new and existing incentive programs for potential business and industry. Critics say it's gotten out of hand and do little for the economy. Here we go again.
Supporters of incentives say the deals are crucial to keeping economies strong, especially in depressed areas. Incentives can reduce the tax burden for locating or expanding a business, of course. Yet, according to front-page editorial in yesterday's USA Today, critics say the tax breaks and other incentives have gotten out of hand, costing taxpayers billions of dollars and doing little for the economy.
The paper reports:
Generous tax breaks given to companies that threaten to take their business elsewhere are coming under increasing scrutiny from state and local officials who say taxpayers aren't getting their money's worth.
"State and local governments offer about $50 billion a year in tax breaks and other economic incentives," according to economists Alan Peters and Peter Fisher.
These days — over more than a decade, truth be told — the use of economic development incentives by states and localities to attract and retain businesses has become increasingly controversial. It's an old issue: policymakers tiring of the economic-development competition and all the incentives they're forced to offer.
In fact, upon further digging around, we found a 158-page report, prepared by the National Association of State Development Agencies back in 1999 for the U.S. Department of Commerce, that noted:
A fundamental challenge facing the practice of economic development may well be controlling expectations about the impacts of incentive investments. In many places, political pressures and haphazard measurement approaches have resulted in elected officials and the public having very high expectations for the impacts of their projects. In fact, rigorous research on incentive impacts has found positive, but limited, impacts from many incentive investments.
"Property tax breaks to manufacturers appear to boost industrial employment for a short time," yesterday's editorial noted John Anderson, a University of Nebraska College of Business economist and former Michigan economic developer, as having said.
"But the impact of incentives dissipates quickly, so in a few years, there's no benefit to employment," Anderson said.
Critics also point to "an entitlement mentality" about tax breaks in the United States today. "Every developer thinks it's his right not to pay property taxes," said Kansas City, Mo., Mayor Mark Funkhouser, who was elected mayor in May after campaigning against tax breaks to developers.
Moreover, some critics say tax breaks take money from services that make a local economy successful. Think police, schools, etc.
As ShopFloor.org points out:
The odd thing is, these eco-devo incentives generally come fourth or fifth on the list of business priorities when selecting a site for a new facility. Look at the methodology from CNBC's "Top States for Doing Business." The top five categories for judging a business climate: Cost of Doing Business; Workforce; Economy; Education; and Quality of Life. Incentives are at most a subset of the "cost of doing business" category, but all the incentives in the world won't attract a business to a location with a lousy workforce, shaky economy and horrible schools.
Interesting point ... Either way, Arizona, Mississippi and New York are among the states apparently re-examining economic development incentives, addressed via recent local government laws or political campaigns.
New York and Hawaii remain the most expensive states to run a business, while South Dakota is the cheapest, according to a Milken Institute study released this month. Record-high rates for office space put New York high in the second spot on the think tank's annual business-cost index, while soaring electricity costs kept Hawaii in the No. 1 spot for the third year in a row.
Breaking down expenses, the study found Connecticut had the highest wages, while Vermont had highest business taxes.
Have tax breaks and other incentives for businesses gotten out of hand? Or is this a worn-out issue from a misinformed national newspaper yet again ruffling some feathers?
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7 CommentsLocal governments complain about competition from other local governments and then collude with developers to use eminent domain to force people out of their homes so higher tax generating businesses can move in.
Maybe governments should take a hint: lower taxes across the board for all and cut spending.
August 23, 2007 2:11 PMI have a ?, I'm about to be training for a davenport screw machine cell at work, I work for Alcoa Fastening Systems, Trrence,California. I'll be in charge of producing fasteners.
Is there any literature about how to manage this position?
August 23, 2007 3:17 PMGood article, better researched and presented than the USA Today story.
But the states which have brought in major companies, BMW, Mercedes, Japanese automakers, and recently ThyssenKrupp AG believe they have created manufacturing centers, and attracted other smaller companies to move to the state as well with a significant impact.
Incentives have been controversial for years, and seem to be a zero sum game if jobs are only relocated, but beneficial if jobs are actually created.
August 23, 2007 4:16 PMI wonder how far the incentives extend? are there the same type for existing businesses?
I mean, I agree that all the issues raised above are valid, and in the light of poor answers to all those questions, except tax incentives, there seems to be a case for keeping business. As it seems the likelihood of attracting New business is Zero, especially when there are countries such as China able to offer far superior costs of manufacturing, whats to stop the existing businesses moving offshore in the pursuit of better profits?
Personally, I'd look at China for more than just the business gains, there're other advantages that USA just can't offer.
August 23, 2007 5:21 PMEd:
Before going offshore, I would suggest you spend a few weeks in the country and the culture.
You may find you get what you pay for.
August 24, 2007 2:06 PMIs there any validity to the legal arguement the I [an individual or a present business owner] is entitled to equal protection under law?
What is equal when I am taxed and another pays no tax? What is equal when, in order to provide goods and services in the taxing entity, I and those like me must pay a share more because some pay nothing? Who and on what basis has it been determined that the "new business" is of more value than I am?
The searching about for tax incentives by a new business location among states or taxing authorities is a vailed form of blackmail and price fixing....stretching even to the legal definition of bribery. If the ALCU spent as much time looking at the constitional impact of these issues as it has nativity scenes and the court house lawn...this issue may have been solved long ago by the court suystem.
August 28, 2007 11:02 AMNot this old story again! Incentives are not going away anytime soon.
Who will be the first state that throws down the sword and says we refuse to fight for a company?
Our own federal government gives away incentives. Should they be ended too?
Companies expect incentives and will favor locations that offer them! Incentives rarely drive a deal but they certainly break ties when other factors are similar in value.
It is up to the state and local governments to ensure that their incentives are "revenue neutral" and enforce "clawbacks" and "recapture" when companies fail to deliver upon their promises.
As one poster noted, it's not about the incentives offered to the big company that really matters, it's about all the companies that come to be near the big company that ultimately creates the "multiplier effect" and is the real engine to growth.
The recent case in the 6th Circuit, (Cuno), backed by none other than Ralph Nader, has demonstrated that the legal challenge to incentives is still stuck in the mud. There are more challenges in the queue too.
Howver, the "Dormant Commerce Clause" is still sleeping for now but if you wake that puppy up, you may as well throw out every states' tax structure and start from scratch since so many elements of various state tax structures violate the same principal.
You just can't get there from here. Does anyone think a flat tax could really work? Don't look now but Santa Clause is in your chimney.
Many years ago now, Gulf States Steel in Alabama complained about Alabama giving incentives to Trico under the same argument of "why give competitors incentives to compete against an existing company." What did Alabama do? Give them some money to go away.
Anyone can threaten to leave but remember what happened to the boy who cried wolf.
The bus is leaving, you better get on or get left behind.
September 11, 2007 8:08 PM
