Four years ago, Columbus, Ohio-based apparel manufacturer The Limited had only to hint it might move a portion of its operations out of state for the government to offer a $600,000 tax incentive to stay put. Those days of easy money may gradually be coming to an end.
Donald T. Iannone, director of the economic development program at Cleveland State University, will deliver “the most comprehensive research on economic development programs [we’ve] ever done” this month on the efficacy of Ohio economic development programs-tax incentives among them. State Sen. Charles Horne’s committee is expected to take up the report early next year as part of a review of state economic development initiatives.
In Washington, D.C., the National Association of State Development Agencies is conducting a survey of state economic development cost-benefit analyses, comparing how each determines the value of incentives to taxpayers, communities and states. And this fall, Greg LeRoy, author of the groundbreaking 1994 “No More Candy Store” study on corporate tax breaks, used a $100,000 charitable grant to establish Good Jobs First, the nation’s first watchdog group to promote accountability of tax incentives and jobs subsidies.
These and other oversight activities constitute “a quiet revolution of accountability” for corporate tax incentives, according to LeRoy. The libertarian Cato Institute estimates federal corporate welfare costs taxpayers $110 to $140 billion a year, while state incentives cost $50 to $100 billion more-and no one has calculated the cost of county and municipal munificence. A 1995 KPMG Peat Marwick survey of 203 Fortune 1000 companies found 160 received some state or local incentive. “There should be better evaluation going on. If we’re going to spend $100 billion a year on incentives, we ought to be willing to spend $10 million to make sure we’re getting some bang for our bucks,” LeRoy says.
Lately, states and communities have become more cautious about simply passing out tax breaks. Some have switched to performance-based incentives. “Some states will literally calibrate the incentives depending on the goals you achieve,” rather than just handing over tax money and trusting companies to hire or grow, says Dr. Sheri Garmise, director of research at the Council for Urban Economic Development, in Washington, D.C. States are also leaning more heavily toward statutory incentives, for which any qualified business may apply, and away from deals negotiated on a case by case basis. This removes the perceived favoritism of some incentives, Garmise says, and spreads the opportunities around.
Other checks on incentives have proved more controversial. Some governments have attempted to write “claw-back” provisions into incentives deals, so companies are obligated to reimburse a portion of tax breaks if the promised job growth or economic development fails to meet expectations. “Sometimes just the threat of the claw-back is enough to make [companies] deliver,” Garmise says. But James A. Schriner, director of location strategies at Deloitte & Touche Fantus Consulting, a site-selection adviser, says, “Claw-backs have proved just a disaster for the states.” Courts rarely uphold them, and communities that use them are stigmatized as unfriendly to further relocations.
Small businesses rarely enjoy the public largesse of tax incentives: Schriner says that’s because states offer small companies a different set of incentives-industrial revenue bonds, workforce training, retail development programs-specially tailored to small business needs. Jim Weidman, manager of state media relations for the 600,000-member National Federation of Independent Business, adds that government oversight, paperwork and accounting changes discourage many from applying for what’s available, while some simply disdain government helping to pick the winners. Most NFIB members would prefer a broad-based tax cut, he says.
“That way everyone’s on a level playing field. Maybe we won’t be able to add 200 employees at my flower shop, but we might be able to add one, and the flower shop down the street might add one,” Weidman says. “It’s less spectacular good news, but it’s good news all around.”
