Do Corporate Tax Abatements Belong in Community Economic Development Strategies?

March 29, 2018; City Lab

“When cities and states offer tax deals for large companies, public education suffers and incomes eventually fall,” writes Sarah Holder for City Lab. Such is the central finding, Holden notes, of a newly released 179-page report by Timothy J. Bartik, a nationally known senior economist at the W.E. Upjohn Institute.

Last September, NPQ called attention to this potential tradeoff, noting that dollars “currently paid in corporate subsidies [might be better employed] to prepar[e] the next generation for success.” Bartik’s research, however, provides more specificity of just where the tradeoffs lie. Bartik’s research is also timely, as bidding for Amazon continues and the use of tax abatements continues to rise. For example, as Jill Cowan in the Dallas News explains in a series of articles published this week, an “economic arms race” has engulfed the Dallas-Fort Worth metropolitan region, with cities and suburbs within the region often bidding against each other.

“There’s no free lunch,” says Bartik. “The incentives have to be paid for, and the money comes from somewhere.”

“Bartik,” Holder explains, created “a model of a typical local economy to find out where, and to put real numbers to some conventional wisdom (and controversial assumptions) regarding economic development agreements.”

Holder’s model allows him to make some estimates regarding leading questions in the economic development field. For example, one common question is “To what extent are economic incentives even responsible for new job creation at all?” Bartik’s conclusion, building upon his previous research, is that “only 10–15 percent of the new jobs companies create in incentive-offering cities and states can really be credited to the incentives they offer.”

Bartik’s model does find that, initially, relocation businesses do create new jobs. These jobs are often filled by migrants, not current residents, but the jobs, typically, do materialize, and a typical business might create an additional 1.5 jobs at other area businesses due to “multiplier” effects caused by the increased incomes and purchases that the new business generates.

But there is also a significant downside. Holder notes that, “Bartik says the most drastic cuts often come out of K–12 education—and skimping on schooling causes the worst damage to communities later. Every 10 percent siphoned from K–12 spending results in a long-term wage decrease in the community of eight percent.”

Then, there is the cost-shifting required to cover for the taxes that the companies who have their taxes abated by definition do not pay. “The lowest income group tends to bear more than its share” due to incidence of sales taxes while “gains in property value benefit upper-income residents,” Bartik’s research shows.

“In all,” Holder notes, Bartik finds “that the net benefits of incentives on local incomes…amount to only 22.3 percent of incentive costs.…In the end, the net income for those in the lowest income quintiles (and the second-highest, surprisingly) actually drops as a result of incentive policies. In places where incentives are explicitly paid for by cutting K-12 spending, state per capita income drops by more than $4 for each $1 spent on tax incentives.”

Bartik doesn’t advocate eliminating economic development incentives, but he does advise reducing them and targeting those that remain. Specifically, Bartik recommends that:

Tax incentives to large corporations should be more targeted. The most important targeting is…on high-multiplier firms. But tax incentives should also be targeted on export-base and high-wage firms, on places and time periods of high unemployment, and on hiring the local unemployed. Tax incentives should be more up front and should not undermine long-term tax bases.
Resources should be shifted away from tax incentives to large out-of-state corporations, and toward customized services to locally owned small and medium-sized businesses.
Incentives should be financed by increasing business tax rates, not by cutting education and other local skills development.

Bartik adds, “The politics of incentives would be quite different if it were understood by all that incentives are best financed by increasing business taxes, and not by cutting education spending. Business tax incentives should be seen as a tool for redistributing business tax burdens away from job-creating businesses and toward other businesses, rather than as a way to lower overall business taxes, or lower overall tax revenues and public services.”

“If you did that targeting, you would be turning down those bigger deals,” Bartik explains. “Then that frees up funds you can use for manufacturing, customized job training, setting up business incubator programs, and doing a variety of things to foster the growth of locally owned businesses through services.”

“The context is that there’s a threat these costs will escalate out of control,” Bartik observes. “If they do, it might impinge even more on educational spending and on the potential for services to small business.”—Steve Dubb