WSW: When Tax Incentives "Tip The Balance" On Business Location

Mar 27, 2017

Southwest Michigan First Innovation Center - file photo
Credit WMUK

Upjohn Institute for Employment Research Senior Economist Tim Bartik says tax breaks and other incentives designed to lure business will tip a small percentage of decisions. So he says it’s important that the incentives offered are effective and evaluated often.

Bartik has created a new database to examine incentives offered in 47 cities across 33 states over 26 years. Bartik says it’s more detailed than previous attempts to evaluate economic development incentives. He says the results cover several different types of industries, and a large percentage of the economy.

There was a rapid increase in tax incentives offered to businesses in the 1990’s. Bartik says beginning in 2000, the picture became more mixed, some states have added more incentives, while others like Michigan have scaled-back. Bartik says the most surprising finding to him was that states do little targeting of their incentives for high wage and high tech industries. Bartik says he also found little is spent on customized job training. Those programs provide funding that allows a community college to provide job training programs. Bartik says those programs could help small to mid-sized businesses that can’t afford job training themselves.

Since tax credits can be expensive, Bartik says it’s important for states to consider whether they actually influence a decision about locating a business. He says research shows they only influence a small percentage of business location decisions. In some states (including Michigan), incentives can only be given if the company would not have located in state without them. But Bartik says that verifying that would require the ability to read minds.

Asked about cutting business taxes across the board, rather than targeting certain businesses, Bartik says that’s relatively inefficient. He says that reduces business taxes for manufacturing firms with high paying jobs, but also for businesses like fast food restaurants. Bartik says changes in tax policy aren’t likely to bring in more fast food business or jobs.

Bartik says many states only offer tax breaks to companies that bring in a large number of jobs. He says that holds down the cost, but Bartik asks does it make any difference to state workers “that you have one company create 500 jobs, or 50 companies create 10 jobs, or 500 companies create one job each?” He says there’s no reason to favor business by size. But Bartik says a ribbon cutting for a new business with 500 employees gets more media coverage and is better politically.

Although he warns that there are limits to what incentives can do to lure businesses, Bartik says states should take some responsibility to create more jobs for residents. But he says it’s important to target those incentives to seek a high benefit for the cost. Bartik says it’s also important to examine those programs to make sure they are working the way they were intended.