Under criticism from newly elected Rep. Alexandria Ocasio-Cortez, D-N.Y., and other progressive politicians, e-commerce giant Amazon pulled out of its planned second headquarters in New York. But was Amazon a needed company that would provide benefit to the region or just the planned recipient of corporate welfare?
A new report on the effectiveness of tax incentives given to companies to entice them to locate to a region or expand doesn’t shed much positive light on those handouts.
The research from North Carolina State University indicates that targeted tax breaks do not promote better fiscal health in the jurisdictions in which they are given. Researchers examined such handouts as property tax abatements and tax credits for investment and research and development across 32 states from 1990-2015, representing 90% of all of these types of incentives.
“It’s not that incentives are bad or that we shouldn’t use incentives,” Bruce McDonald, leader of the research team, told Governing. “But if a state or local government is going to provide an incentive, there needs to be some kind of clarity on what the realistic expectations are for what they might get back.”
Tax breaks for job creation, which represent the largest portion of incentive spending, don’t actually aid fiscal health, the report says. McDonald said that new employees positively contribute back to states through their income taxes, but those taxes “become a wash” as they just pay back what was given on the incentives. Some states have also done a poor job of actually checking to make sure jobs were actually created as promised.
And property tax abatements, another common incentive, make states more reliant on other volatile levies such as income and sales taxes that can drop rapidly during recessions.
Speaking of tax incentives collectively, the report notes that “while these incentives may encourage the expansion of the state economy, they can also impact financial resources that a state [has] by limiting the revenue available to a government or requiring additional expenditures to fund the grants or to meet the demand for public services that comes with the economic expansion.”
The research found that tax incentives as a share of business taxes tripled during the time period studied. Governing notes the number hasn’t fluctuated much in the past few years as some lawmakers have clawed back on these types of incentives.
“Some states have curbed their awards while others have become more aggressive, keeping the aggregate share roughly the same,” wrote Mike Maciag of Governing.
Research and development tax credits were found to be the incentive most closely tied to weaker state financial health. The researchers say that’s because effective R&D leads to broader positive effects on the national economy rather than on the local level.
The states who have recently relied on financial incentives the most are Iowa, Louisiana, New Mexico, New York, and Pennsylvania. The states who showed the most weakened fiscal health — or the greatest average of expenses compared to revenue from the incentives — were Alabama, Kentucky, Louisiana, Massachusetts, and Pennsylvania.
Johnny Kampis is an investigative reporter for the Taxpayers Protection Alliance Foundation.
