Friday, April 22, 2011

WSJ: States Start to Rethink Tax Incentives

The WSJ has an interesting story on the fallout from years of states waging war on each other by trying to lure businesses via handouts and tax breaks.  This is essentially what the large multinationals have done on the global stage, but unlike federal governments, our states are limited by balanced budget provisions.  On one hand you can understand what the states are doing, because as fewer private sector jobs remain in the U.S. the demand for said jobs increases.  Economics 101 says the "price" of those jobs increases - hence states throwing money in every direction to try to keep or attract them.  But many are seeing the Return on Investment (ROI) in the long run is poor, as once the money is delved out, many companies fail to deliver... or restart the game once more 4-5 years down the road.  Of course this discussion leaves out the potential corruption between political leaders and the business community in these sort of deals, and the issue of fairness when the masses of people are taxed so a small select group of businesses can benefit.


  • The budget vise squeezing states and cities is changing the economic-development game. Governments are attaching more strings to their offers of tax breaks, cheap rents and bond deals designed to lure business, and are getting tougher on past recipients who didn't come through.  Officials fret that taxpayers will look askance on any giveaways to business that don't yield a clear benefit, at a time when governments are paring services to save money.  
  • State and local governments collectively give more than $70 billion a year of incentives to lure business and jobs, primarily through tax breaks.  Economists have long debated the wisdom of such incentives. Supporters say they help states build diverse local economies and boost employment, ultimately generating more tax revenue than they cost. Detractors say perks sometimes go to businesses that would have come anyway, and in other cases just enable companies to play one region against another for a sweeter deal
  • One downside of the arrangements from the standpoint of businesses, which need to be able to adjust output to demand, is the inflexibility of being locked into a jobs commitment. Many companies weathered the financial crisis by cutting jobs, not creating them. So even as states take a harder line on incentives, amid budget strain, the same weak economy drives companies to press for every possible concession. 
  • "Companies are being forced by shareholders to play the incentive game to get the best deal possible," says Brent Pollina, vice president of Pollina Corporate Real Estate Inc., a site-selection firm that represents businesses planning moves. Ever since the recession struck, he says, "companies are trying to get as much up-front as possible from communities."
  • In New York, another state facing tight finances, new governor Andrew Cuomo complained in his budget message that economic-development spending had soared, while not doing enough to create jobs. Such spending totaled about $1.55 billion in the fiscal year ended in March, more than triple the level a decade earlier, a time during which the number of manufacturing jobs in the state declined by more than a third, according to the budget briefing.
  • Massachusetts revoked tax breaks or other economic-development perks for 74 companies in 2010 for failing to create the promised jobs. That compares with 18 such revocations in 2007, before the financial crisis hit.  
  • But getting that money back is difficult. Massachusetts officials believe they may be legally able to salvage only about $3 million of $21 million in grants given four years ago to Evergreen Solar Inc. The company was supposed to create 350 jobs at a plant near Boston and maintain them for eight years, but it is now closing the plant after just three years.

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