Jobs, Growth and the Dubious Worth of Tax Incentives

By on December 5, 2018

From Governing:  As governments struggle to keep and attract employers and jobs, economic development incentives such as tax-increment financing and tax abatements are becoming more popular, as evidenced by the nationwide frenzy to offer massive tax breaks to attract Amazon’s second headquarters. This is happening despite the growing body of research documenting that in the aggregate incentives are largely wasted, subsidizing projects that likely would have happened anyway and creating little or no new investment or job growth.

Spurring development in economically moribund areas is a worthy policy goal, and in some cases forgoing tax revenue in the short term may be a good way to achieve long-term success. But it isn’t always obvious which investments will yield the best return on taxpayer subsidies. After all, every urban developer hoping for a handout will paint a rosy picture of a project and the jobs and investment that will result. How are policymakers to determine which projects are worthy and which are not?

Our state of Missouri is a compelling place to study such incentive programs. According to Good Jobs First, as of November 2017 Missouri had 4,113 active state and local economic development subsidy awards with a total value of just under $6 billion — some of them in existence since before 2007. That dollar figure puts us 11th in the nation, ahead of larger states like Illinois and California. If such subsidies were an effective way to attract growth, evidence should abound.

Such evidence hasn’t been easy to find. Methods for researching the impact of subsidies vary widely, and the outcome of a study reflects the method used by the researchers. In May 2016, for example, the St. Louis Development Corporation released a study of economic development incentives. Researchers looked at use of various incentive programs and compared the value of the incentive with the increase in assessed value and job growth over time. The study concluded that development incentives had little or no positive economic development benefits, despite the $709 million the city had spent on them in the 15 years leading up to the study. Incentives had not created jobs, revitalized neighborhoods or increased long-term tax revenues. Moreover, the level and quality of reporting on incentives was so poor that, as the researchers wrote, officials and the public “cannot readily determine what may or may not be deemed a project worthy of consideration for a City tax incentive.” These are damning conclusions, and the city’s leaders are studying ways to reform the system.

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