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Why states and cities should stop handing out billions in economic incentives to companies

Foxconn groundbreaking
REUTERS/Kevin Lamarque
President Donald Trump, center, taking part in a groundbreaking with then-Gov. Scott Walker, left, and Foxconn Chairman Terry Gou during a visit to Foxconn's new site in Mount Pleasant, Wisconsin, on June 28, 2018.

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.

Nathan Jensen
Nathan Jensen
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.

Estimates of how much is spent on such incentives range from U.S. $45 billion to $80 billion a year.

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 as 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

Even when an incentive does draw new investments, they rarely pay off. And they can even harm the fiscal health of cities and states by pulling resources away from other more productive activities.

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.

A legislative audit found that the Wisconsin agency responsible follows problematic oversight practices and failed to verify that companies created the number of jobs or other goals they claimed.

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.

Ending incentives

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.

Powerful special interest groups are also to blame, as they play a big role in shaping incentive programs and lobby vigorously for lawmakers to create them and keep them alive.

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.

Nathan Jensen is a professor of government at the University of Texas at Austin.

This article is republished from The Conversation.


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Comments (10)

  1. Submitted by David Lundeen on 07/24/2019 - 10:38 am.

    Great article. Simply put, it’s socialism for the rich, and capitalism for the poor.

  2. Submitted by William Hunter Duncan on 07/24/2019 - 01:06 pm.

    Yep – and when corporations get local tax cuts, all that money flows to executives and shareholders, who then pay a reduced rate in capital gains taxes, while the local people who are hired to work for the corporation take on the tax burden the corporation would otherwise have shouldered, while their wages are stagnant, and pay higher rates of taxes than the executives and shareholders. Probably someone making $60,000, with income taxes, taxes on utilities, cable, consumer goods, property etc, pays about 40% of their income in taxes. Under Armour billionaire? Likely less than 20%. Sick.

    It is all backwards. Reduce income taxes for working people and small business, tax corporations and rentier/capital gains income at a higher rate, tax obscene wealth, automation and pollution.

    That is why I am done voting for either party, most politicians having sold their soul to corporations, banks and billionaires. I will vote again when I hear a politician talking some actual sense about taking care of working people and the health of the earth.

    • Submitted by Pat Terry on 07/24/2019 - 04:26 pm.

      The banks and billionaires thank you for your support. Your failure to discern the difference between the parties keeps them in power.

      • Submitted by William Hunter Duncan on 07/25/2019 - 08:06 am.

        Clinton deregulated the banks, which gave us the housing bubble, Bush’s “Ownership society.”

        Then Obama giggled as bankers gave each other fat bonuses with bailout money, while ten million foreclosures raged across the nation.

        Sick of being lied to and manipulated, many a white, black and hispanic working class voter chose Trump (falling for “Make America Great Again” just as they had for “Hope and Change”).

        This is why I won’t vote for Dems – unless the party actual stands up to the banks and billionaires – because I get lectured by people who still act as though Dems Clinton and Obama were saints while those horrible, horrible republicans have ruined everything.

      • Submitted by Tom Crain on 07/25/2019 - 09:57 am.

        Thomas Frank wrote a book in 2016 titled “Listen, Liberal” which details and exposes the cynicism, capitulations and fecklessness of the Democratic Party. This is not the typical right wing screed devoid of fact. It is a sober analysis of where the Democratic party went wrong, how it became a party that claims to serve the interest of the working class, while actually benefitting from the very inequalities its members decry.

        • Submitted by Pat Terry on 07/25/2019 - 01:03 pm.

          I read that book, because I had liked What’s the Matter With Kansas. This one isn’t a right-wing screed, but it certainly isn’t fact-based or anything close to sober analysis. Its a pathetic exercise in intellectual dishonesty.

          But the point stands – if you can’t distinguish the massive differences between the two parties, the billionaires have won.

  3. Submitted by Edward Blaise on 07/24/2019 - 02:29 pm.

    And the good news, I guess, is that we (MN) pretty much do not do this anywhere near the scale of other states. I have a friend who was the DEED representative for a good size chunk of the state and he indicated that they could do small things; but, millions were not there to be thrown around. We count on an educated population, a solid state infrastructure, sports and cultural scene and quality of life to influence development here. These things are the result of, GASP!, taxes.

    As Republican Oliver Wendell Holmes Jr. told us:

    “I like to pay taxes. With them, I buy civilization.”

    Or we could take the route of Mississippi and other states and just offer legal bribes as described in the article…

    • Submitted by Henk Tobias on 07/24/2019 - 05:46 pm.

      Holmes was right, tax rates on Corporation and upper income Americans are at historic lows. No one could call the things going on in this country civilized. President of the United States putting Children in cages, demonizing people for their religion, race or gender. I thought it was the cretin in the White House, who knew it was low tax rates?

  4. Submitted by Joel Stegner on 07/24/2019 - 04:43 pm.

    States cannot solve national problems. If 45 states passed prohibitions, the remaining states would cash in. Bluntly, Republicans believe in socialism for the rich, so it is naive to think this will go away without a protracted battle. If there are tax incentives, they should be federal go to small or start up businesses that are willing to go to communities with high unemployment and generational poverty – the distressed urban core and rural America. Wealthy suburbs should not be doing this, but that is where a lot of it is happening.

    • Submitted by lisa miller on 07/24/2019 - 08:47 pm.

      Add to it, as business increases, so do the strains on the local community which then falls to the property tax payers–more roads, more traffic, more need for 911, increased students at the local school.

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