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The views expressed are those of the author and do not necessarily reflect the views of ASPA as an organization.
By Ben Tafoya
February 23, 2016
Economic development is one of the terms in public administration that has different meanings to different actors under different conditions. For some, it is a policy area that leads to increased jobs or higher incomes for area residents. For others, it refers to the challenge of expanding a tax base to help generate revenues that fund expanded community services. Other uses of the concept include redeveloping underutilized property to remove blight. Finally, some communities are challenged with a lack of retail establishments and consumer services that leaders try to enhance to engender a greater sense of community.
Each of these concepts requires a specific set of actions by state and local government leaders to further their specific goals. In the U.S. system, with the absence of federal planning, the process of economic development, however it is defined, is largely left to state and local government. As a result, we have a dizzying array of incentives to promote one or another of the goals. Broadly speaking there are two kinds of opportunities for tax reduction, “as of right” incentives and selective incentives. Examples of “as of right” include investment tax credits, which reward firms that make capital investment in plant and equipment. For example, Massachusetts gives a corporate tax reduction for firms in manufacturing and other encouraged industries. Selective credits include those like The Indiana EDGE program, which “reward” firms for hiring new workers as a result of meeting specific criteria reviewed by the state.
Certainly, part of the conversation relates to the effectiveness of the various programs. Given that the nation is covered by these programs, how do they differentiate among the states in such a way that they actually make a difference? The challenge of the selective programs is how you prove the counter-factual. Would these projects go forward in the targeted state and locality in the absence of the incentive? According to research compiled by the Tax Foundation, virtually every state with a corporate income tax has some combination of job, investment or research incentives. The incentives give subsidies for capital investment, hiring, payroll and sales tax rebates and infrastructure improvements.
A new study from the business subsidy-tracking group, Good Jobs First, looked at 4,200 awards in 14 states. They found that 80 percent to 96 percent of the dollar value of incentives went to large businesses. The study, “Shortchanging Small Business,” recommends limiting the awards to only smaller firms (less than 101 employees). In an unpublished paper by this author, an examination of 1,200 instances of selective incentives over a 15-year period in Massachusetts found the communities that most frequently use the incentives are below the median in income and wealth. Several hundred of the incentives went to firms that invested a million dollars or less in plant and equipment which raises the question of effectiveness given what little a million dollars can buy in much of the state. From the perspective of policy implementation and analysis, giving incentives to big and smaller firms could be wrong as the direction of the programs should depend on the four goals outlined in the opening paragraphs.
To some extent, Massachusetts recognized this in 2010 when it rolled out new rules for incentive programs giving firms more options as to how to qualify. While the state has cut down on use of the incentives for retail establishments, it does allow firms to apply for incentives based on adding employees rather than capital investment. The state government is also increasing efforts to make firms prove the employment activity results in additional jobs into the Commonwealth from outside rather than movement from one city to another. On the other hand, it does allow firms to qualify based on maintaining manufacturing operations in a poorer community. The state has also become more aggressive in rolling back incentives from firms that do not meet employment goals. This illustrates the point of critics of the tax incentive programs that (for example) property taxes are not a big enough concern to change the behavior of a firm.
The place based incentives and corporate tax abatements provide easy to recognize evidence that public officials are trying to generate economic activity in their communities. However, many of these programs deprive states and communities of necessary resources to improve the quality of life of its residents. Alternative policies exist in terms of expedited permitting and cooperative programs for workforce development which might give communities a more substantial advantage in the search for good jobs and incomes. Expedited permitting might save firms money in design and construction. While a more educated and skilled workforce will save firms money in hiring and training. The literature on tax incentives is full of the debate among economists and policy analysts as to the effectiveness of the programs. Many of the communities utilizing these programs have multiple needs for “economic development.” particularly jobs, incomes and higher order property redevelopment. Aligning the goals of the community more closely with public action can improve the outcomes.
Author: Dr. Ben Tafoya is the undergraduate program director in the School of Public Policy and Administration at Walden University. He served as a local elected official in Massachusetts for nine years and is still active in governmental affairs. Ben has his Ph.D. in Law and Policy from Northeastern University and a B.A. in Economics from Georgetown University. He can be reached at [email protected].