A $46
million Connecticut deal with a pharmaceutical company meant spending $230,000
per new job.
Every
state does it, to one degree or another: pays incentives to private companies
to keep jobs in-state. Supporters say this is necessary for job creation,
detractors call it corporate welfare, and nationwide it costs more than $80
billion a year. So when are such incentives sound economic policy, and when do
they merely serve certain firms, lobbyists and politicians?
Jobs
created with incentives are good when they are net contributors to the economy.
They are bad—handouts, effectively—when the incentives cost the state more than
the jobs contribute back to the economy. The Connecticut Policy Institute has
identified three criteria for determining when job incentives go from good to
bad:• Does the total cost of the incentive exceed the amount that would be paid
back through incremental tax revenues over 10 years? In most states, this
threshold is crossed when the total cost of the incentive rises above 50% of
the annual compensation for jobs kept or created.
Do
the incentives provide only for jobs that would not otherwise come to the
state, or would otherwise leave?• Do the
incentives promote jobs that will remain viable and stay in-state after the
incentives expire? Some state incentive programs meet these criteria.
In
October 2012, Kentucky offered Berry Plastics $10 million to refurbish and
reopen a manufacturing plant in Madisonville, about 150 miles southwest of
Louisville. Berry committed to bring 400 jobs to Kentucky, a reasonable rate of
$25,000 per job. The plant had closed in 2011 because the products it produced
could be more competitively produced elsewhere. But the refurbished plant will
produce a different product that can be competitively produced in Kentucky. Most
incentive programs aren't so effective. In 2011,
Connecticut
agreed to pay The Jackson Laboratory, a genetics research institute, $300
million in exchange for a promise to bring 300 new jobs to Connecticut. That
cost a whopping $1 million per job. The same year, Connecticut paid Alexion
Pharmaceuticals ALXN +1.07% $46 million to commit to hiring 200
new employees. At $230,000 per job, this still far exceeds the threshold for a
sound investment in the state's economy.In 2007,
Michigan
announced a film-industry incentive program that would reimburse 50% of
production costs spent in the state. The program brought hundreds of jobs to
Michigan, according to local records, but when the incentives expired in 2011
the movie producers relocated and the jobs disappeared. Incentive programs can
be problematic even when not targeted at particular companies or industries.
Oklahoma's
Small Business Capital Formation Incentive Act provides a 20% tax credit for
investments in Oklahoma small businesses. In 2009, reported the Oklahoma Tax
Commission, the program cost the state $17 million but generated only 21 new
jobs.
Connecticut
recently passed a Job Expansion Tax Credit awarding businesses a subsidy of up
to $32,000 per employee for every new hire between Jan. 1, 2012 and Jan. 1,
2014. This subsidy will induce businesses to hire some employees they otherwise
wouldn't, but much of the cost will be wasted paying companies for hires they
would have made anyway.
Meanwhile,
there is no guarantee that any of the new employees will still have jobs once
the subsidy expires three years after their date of hire. If many job
incentives are poor public investments, why do states get away with offering
them?
Because
good policy and good politics are often at odds. Politicians want to be
re-elected, and a solid record on nominal job growth—regardless of the
cost—tends to be more important to officials' re-election prospects than is the
prudent management of public funds. That is one reason most such programs are
structured to yield job creation immediately while deferring
the cost of the incentive into the future—preferably when other politicians
will be in office.
State
competition for jobs should be a good thing that promotes fiscal stability, low
tax rates, dynamic labor markets, balanced regulatory environments and responsible
investment in infrastructure and human capital. These—and not one-time tax
breaks—are the factors that are most likely to attract employers and drive good
jobs policy.
Source:
Wall Street Journal, February 8, 2013, 5:55 p.m. ET by Tom Foley and Ben
Zimmer
Mr.
Foley, the 2010 Republican nominee for governor of Connecticut, is founder of
the Connecticut Policy Institute, of which Mr. Zimmer is executive director. A
version of this article appeared Feb. 9, 2013, on page A11 in some U.S.
editions of The Wall Street Journal, with the headline: Why Some State
Incentives for Business Work—And Others Don't.
Comments:
Companies who move their manufacturing and other
labor-intensive operations overseas receive incentives from those countries as
well. Most of these are low-cost
locations and therefore wage costs are lower.
The need for proximity to the customer is one key to retaining
operations in the U.S. Food and
household goods are still produced in the U.S. Beer bottling can be found in
the U.S. in highly automated facilities. Besides automation, other factors
include the need for quick delivery and shipping costs. The
U.S. has a large consumer market with necessities like food, water, shelter,
electricity, natural gas, roads and automobiles. Most other durable goods can be made
overseas. Food grown in warm climates like
bananas may come from overseas. Most repair
services and many distribution warehouses will be U.S. based.
Economic development incentives need to be structured to address
the prospects needs and avoid steep drops that could signal he need for them to
move.
Government creates problems by enacting laws that allow the
creation of regulatory overreach with no real benefit. Job killing laws and regulations need to be
repealed and pared back. This strategy
works much better than bribing an ever-shrinking number of companies to move to
our state.
Norb Leahy, Dunwoody GA Tea Party Leader
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