Some states and cities are getting very little for the taxpayer dollars they hand out to companies. Atstock Productions/Shutterstock.com
U.S. states and cities hand out tens of billions in taxpayer dollars every year to companies as economic incentives.
These businesses are supposed to use the money, typically distributed through economic development programs, to open new facilities, create jobs and generate tax revenue.
But all too often that’s not what happens, as I’ve learned after doing research on the use of tax incentives to spur economic development in cities and states across the country, particularly in Texas.
Recent scandals involving economic development programs in New Jersey, Baltimore and elsewhere illustrate just what’s wrong with these programs – and why I believe it’s time to end this waste of taxpayer dollars once and for all.
Economic development 101
Many states, counties and cities have economic development agencies tasked with facilitating investment in their communities.
These agencies undertake a variety of valuable activities, from gathering data to training small businesses owners. Yet one of their most high-profile activities is the use of tax and other incentives to entice companies to invest in their communities, generating local jobs and expanding the tax base.
But what do taxpayers get for all this money? As it turns out, not much.
1. A waste of money
First off, in most cases, investments that result from these incentives would have happened anyway.
That was the case in Baltimore involving a federal program meant to spur development in distressed communities it dubbed “opportunity zones.” ProPublica reported in June that Maryland accidentally designated an area of Baltimore that wasn’t poor and was already under redevelopment an opportunity zone. Despite catching the error, the state kept the designation, allowing real estate investors to potentially claim millions of dollars in tax breaks. Those investors include Kevin Plank, the billionaire CEO of Under Armour, who owns about 40% of the zone, according to ProPublica.
This example isn’t unique. Last year, Tim Bartik, an economist at the Upjohn Institute for Employment Research, reviewed 30 studies on the use of economic development incentives. He found that 75% to 98% of companies were planning to make the desired investment anyway.
In my own work in Texas, I found that more than 85% of the companies offered tax breaks had already planned to open the promised new facilities. A few even broke ground before applying for the incentives.
And in New Jersey, investigators who uncovered abuse in the state’s economic development program found that a lawyer representing a powerful Democratic official drafted legislation to benefit companies tied to him and his associates, to the tune of hundreds of millions of dollars. Their June report described how the New Jersey Economic Development Agency didn’t perform the basic due diligence of a single Google search, which would have shown that some of the companies had already announced a move to New Jersey before being offered incentives.
2. Investments rarely pay off
In “Incentives to Pander,” a book I co-authored with Duke political scientist Edmund Malesky, we reviewed the academic literature in the U.S. and elsewhere on the use of incentives and found that they are expensive and ineffective in generating employment and economic growth.
Wisconsin residents may be learning this the hard way after their government offered electronics manufacturer Foxconn over $4 billion in incentives in exchange for a promise to build a high-tech facility that is supposed to create 13,000 jobs. But since the 2017 announcement, the company has failed to meet job targets and even downgraded the type of facility it plans to build.
3. A failure of oversight
A third problem is that government agencies fail to provide effective oversight to ensure that company promises on investment and employment like Foxconn’s are upheld.
Wisconsin isn’t alone. Many states and municipalities provide limited oversight of the economic incentives they offer and often rely on companies’ self-reported data to determine whether they’ve met targets. In Texas, doctoral candidate Calvin Thrall and I found that the state even allowed companies to renegotiate their job creation targets, sometimes the day before they were required to report compliance with an incentive agreement.
And even though these deals are often accompanied by splashy PR campaigns that highlight how many jobs will be created, the incentive contracts often don’t even include actual job creation requirements. And only 56% of cities surveyed indicated that they required a performance agreement before offering incentives.
New Jersey investigators found similar oversight problems and other shortcomings in its economic development program.
Finally, a lack of transparency surrounding these programs makes it hard for others to determine whether taxpayers got what they were promised.
So you’re probably wondering, if these incentives don’t work, why do government officials continue to use and promote them?
The book I wrote with Malesky and a related paper showed how these incentives provide a way for politicians to take credit for business investment – in the hopes that it will give them a lift in their next election. All they have to do is convince voters that these programs work and that the grand promises being made when officials cut ribbons in well-publicized ceremonies will eventually pan out.
Rather than reform or rebrand these programs, I believe states should take the advice of some of their own evaluations of these programs and eliminate them. Taxpayers would be better off without them.
About The Author
Nathan Jensen, Professor of Government, University of Texas at Austin
Drawdown: The Most Comprehensive Plan Ever Proposed to Reverse Global Warming
by Paul Hawken and Tom Steyer
In the face of widespread fear and apathy, an international coalition of researchers, professionals, and scientists have come together to offer a set of realistic and bold solutions to climate change. One hundred techniques and practices are described here—some are well known; some you may have never heard of. They range from clean energy to educating girls in lower-income countries to land use practices that pull carbon out of the air. The solutions exist, are economically viable, and communities throughout the world are currently enacting them with skill and determination. Available On Amazon
Designing Climate Solutions: A Policy Guide for Low-Carbon Energy
by Hal Harvey, Robbie Orvis, Jeffrey Rissman
With the effects of climate change already upon us, the need to cut global greenhouse gas emissions is nothing less than urgent. It’s a daunting challenge, but the technologies and strategies to meet it exist today. A small set of energy policies, designed and implemented well, can put us on the path to a low carbon future. Energy systems are large and complex, so energy policy must be focused and cost-effective. One-size-fits-all approaches simply won’t get the job done. Policymakers need a clear, comprehensive resource that outlines the energy policies that will have the biggest impact on our climate future, and describes how to design these policies well. Available On Amazon
This Changes Everything: Capitalism vs. The Climate
by Naomi Klein
In This Changes Everything Naomi Klein argues that climate change isn’t just another issue to be neatly filed between taxes and health care. It’s an alarm that calls us to fix an economic system that is already failing us in many ways. Klein meticulously builds the case for how massively reducing our greenhouse emissions is our best chance to simultaneously reduce gaping inequalities, re-imagine our broken democracies, and rebuild our gutted local economies. She exposes the ideological desperation of the climate-change deniers, the messianic delusions of the would-be geoengineers, and the tragic defeatism of too many mainstream green initiatives. And she demonstrates precisely why the market has not—and cannot—fix the climate crisis but will instead make things worse, with ever more extreme and ecologically damaging extraction methods, accompanied by rampant disaster capitalism. Available On Amazon
From The Publisher:
Purchases on Amazon go to defray the cost of bringing you InnerSelf.comelf.com, MightyNatural.com, and ClimateImpactNews.com at no cost and without advertisers that track your browsing habits. Even if you click on a link but don't buy these selected products, anything else you buy in that same visit on Amazon pays us a small commission. There is no additional cost to you, so please contribute to the effort. You can also use this link to use to Amazon at any time so you can help support our efforts.