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

Why states and cities should stop handing out

billions in economic incentives to companies

July 11, 2019

Nathan Jensen, University of Texas at Austin

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.

Estimates of how much is spent on such incentives range from US$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 an opportunity zone.

Despite catching the error, the state kept the designation, allowing Kevin Plank, the billionaire CEO of Under Armour, and other investors to potentially claim millions of dollars in tax breaks.

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.

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