Taming tax incentives so they actually serve local residents

Economic development tax incentives have moved to the frontline of national policy debates. How can we best help former industrial communities that have been left behind? In metros with strong economies, how can we make economic growth more inclusive to all groups? Are current tax incentive policies the only alternative?

In New York City, the $3 billion package delivered by Governor Andrew Cuomo and Mayor Bill De Blasio to successfully lure Amazon ran into a political buzzsaw due to real and perceived exclusion of community representation in the process and the absence of tangible economic benefits to those disconnected from New York City’s white-hot economy.

{mosads}Similar tensions are seen in the still-transitioning factory-economy cities of the Midwest and elsewhere. In Detroit, a running, racially-charged battle is being waged over the right degree of citizen engagement and community benefits built into development deals that are featured as part of the city’s comeback.

In Wisconsin, handing FoxConn $3 billion in taxpayer dollars — more than one-third of the workers’ wages for 20 years — has fueled the local and national movement second-guessing tax incentives as a tool for economic development

Tax incentives can help create good local jobs for residents, but only if scaled back, targeted to industries with the greatest spillovers for local job growth and coupled with local services to businesses and residents that increase local hiring. Those are the findings in a new W.E. Upjohn Institute report: “Building Shared Prosperity: How Communities Can Create Good Jobs for All.”

Our research suggests that many if not most business tax-sweetener programs are wasteful. They tip the actual business location or expansion decision in less than 1 in 4 cases; and only 1 in 5 new jobs that are created go to local residents.

Incentives can be made more cost-effective through smart policy and supportive services. Target particular industries and communities, and not forever. It’s also important to note that all jobs are not created equal.

In some high-tech clusters, each new job may lead to two other new jobs with other local employers, so targeting these high-multiplier jobs may make sense.

But in many lower-wage industries, multipliers are small, and incentives don’t make sense. Also, more jobs (and higher earnings) are reaped by local residents when incentives target areas of high unemployment.

In addition, long-term tax incentives make little economic sense. The tax dollars a state gives away 10 years from now do little to affect business-location decisions today but just give away the next governor’s tax base.

Multiply bang-for-buck with supportive services. Particularly if governments save money on the front end by not offering huge tax incentives, they can spend that money smartly by providing other less-costly business services, which will ultimately have greater net benefits for local residents.

They should make the development process less needlessly bureaucratic by updating zoning maps, streamlining the permitting process and making it more transparent. Governments should also proactively guide developers through the process, including packaging land and utilities.

Additionally, providing various types of customized business services (particularly for smaller companies) at relatively modest cost  — like customized job training, small-business development centers, business incubators and manufacturing extension services — can increase business productivity by five times the investment.

In this regard Virginia’s Amazon package made more sense than New York’s Amazon offer as well as the deal given to Milwaukee’s FoxConn.

As detailed in Building Shared Prosperity, the Virginia deal relied less on cash incentives and more on leveraging large-scale investments in transportation and education system-building, likely to pay off whatever happens to Amazon.  

Business-location tax incentives deserve the kind of hard scrutiny the Amazon sweepstakes and FoxConn debacle demand. More targeted and limited tax incentives, combined with lower-cost business services, can be cost-effective ways of delivering for local residents and communities.

Timothy Bartik is a senior economist with the W.E. Upjohn Institute. John Austin is director of the Michigan Economic Center, and a research fellow with Upjohn (@UpjohnInstitute on Twitter).