States Reconsider Tax Incentives Designed to Lure Businesses

Many lawmakers believe that offering generous tax incentives to businesses is good policy that spurs economic growth. However, some states’ experiments with such incentives have failed, as seen in Kansas. There, as we recently explained, the legislature is now tasked with finding hundreds of millions of dollars to balance the state budget that faces a $280 million shortfall this fiscal year. In addition, the anticipated boost for the economy, in general and small businesses in particular, has not materialized, and it may take years to realize the benefits of the tax cuts. Ohio is another state whose anticipated benefits may not materialize for the economy, according to the Tax Foundation.

It is not surprising that Bloomberg Business reported last week other states are rethinking tax incentives meant to lure jobs and investment as they confront budget shortfalls and question the effectiveness of the incentives. For example, Michigan had to fill a $300 million budget hole this year, Louisiana faces a $1.6 billion deficit, and Oklahoma anticipates a $611 million shortfall next fiscal year.

The article quoted Jeff Chapman, director of economic development at the Pew Charitable Trusts in Washington, who acknowledged that there is still a sense that incentives are necessary to remain competitive. But “[j]ust because you have to have incentives doesn’t mean you have to have all the incentives and pay whatever cost you’re currently paying.”

In Louisiana, Gov. Bobby Jindal proposed reducing corporate subsidies by $526 million to help balance the budget. This could affect a tax credit for filming movies, and suspend tax exemptions for hydraulic fracturing (fracking) for two years, which would cost approximately $289.4 million.

As for Oklahoma, Bloomberg Business quoted Rep. David Dank, the chairman of the subcommittee on Revenue and Taxation, who said that “[i]t’s time to draw a line in the sand and say, ‘[n]o more.’” The subcommittee will not consider new credits or exemptions. Gov. Mary Fallin acknowledges the need to be competitive as a state, but expects to be looking more carefully at whether incentives actually create jobs or spur investments.

In Illinois, Gov. Bruce Rauner recognizes the trade-off, but wants to limit corporate welfare by capping tax credits that he says “awarded millions of dollars in breaks for job retention to companies that have dismissed workers.” Two months ago, the Chicago Tribune revealed that Gov. Rauner had hired a new chief financial officer, Donna Arduin, promising her $120,000 for a four month contract to “address the stew of challenges facing Illinois: a history of overspending, massive pension debt, a steep drop in tax revenues, and a vast political divide between the governor and legislature.”

Ms. Arduin favors reliance on consumption taxes over income and property taxes because, she believes, the latter stunts growth. A separate Bloomberg Business article reports that she recommended Kansas’ state income tax rollback, and that Gov. Brownback has recently proposed increases in consumption taxes to close the budget hole.

Despite all this, lawmakers continue to pursue deals. Bloomberg Business noted that states and localities approve about $50 billion in tax breaks a year, and the number of deals with incentives greater than $100 million has doubled since the recession. These are promoted as a way to spur expansion, attract jobs, and retain companies. Last year, Nevada offered $1.3 billion to lure a Tesla Motors Inc. battery manufacturing plant. And the state of Washington gave Boeing Co. tax breaks worth $3.2 billion in 2003. In 2013, it offered another $8.7 billion to keep work on the 777X jetliner in Seattle.

Officials who were desperate for jobs during the recession are paying more attention to the cost and whether the programs deliver what they promise.