Job Creation and the Snake Oil of Tax Incentives

The pressure to give away the public's money for economic development is as strong as ever, but the pushback is growing.
by | July 29, 2013
 

Every politician wants to appear to be creating jobs. The problem is that in America today most elected officials think that the way to do this is through the use of tax incentives. Even when they sincerely want to do the right thing, the pressure to give away the public's money is just too strong: Ribbon-cuttings celebrating business openings secured with public dollars are a staple of the political realm. If you're not seen doing these regularly, you can be assured that you'll be called a "jobs killer" in attacks fueled by corporate interests that see you as denying them a place at the public trough.

The truth is, when used in a narrowly focused way to achieve a specific public purpose by correcting a market failure, the use of tax incentives for economic development can be justified -- for example, to bring a decent grocery store to a neighborhood where the residents do not have access to healthy food at reasonable prices. In this case, the income base in the area might initially be insufficient to support a store profitably, but once it is built higher-income residents may find the area more desirable and begin to move into the area in such numbers that after a few years the store is sustainable without a government subsidy.

Think of it as taking antibiotics to cure an infection. Taking the right drug and the right dose for a specific period will speed your recovery, but it is not a substitute for a healthy diet and exercise, and taking too much too long will be very unhealthy. Similarly, over-reliance on tax incentives is hard on governments' fiscal health.

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Things may be shifting. Even as the frenzy of tax incentives continues, there is more and more pushback and criticism. This is in part because of the continued efforts of groups like Good Jobs First.

I first became aware of this national policy-research organization when I was auditor of Kansas City and began to look at the issue of economic development and the use of tax incentives. We were looking for ways to judge the results of the city's economic-development activities, and Good Jobs First proved to be a steady source of sound information and analysis. Its work has a clear "working families" point of view, but is rigorous and heavily footnoted to publications such as National Tax Journal, Contemporary Economic Policy, the Journal of Urban Economics and reports issued by the various Federal Reserve banks.

For state and local officials who want to know how to go beyond appearances and actually make a difference, Good Jobs First is an incredibly valuable resource - not least as an antidote to the kind of business-climate studies churned out by organizations like the American Legislative Exchange Council (ALEC) that prescribe lower corporate and personal tax rates, fewer protections for workers and the use of corporate tax incentives as the route to economic growth. The principle test of one of these models is whether or not it can be used to predict economic growth. On that measure, most of them fail.

To see what actually works, read "Selling Snake Oil to the States," a study Good Jobs First produced in partnership the Iowa Policy Project that is a rebuttal to ALEC's economic-development prescriptions. Chapter 2 of that report, "Prosperity: Its True Sources and Consistent Measures," is a compact gem. In just four pages, heavily footnoted and backed up with regression analysis and scatter graphs, it documents what works to increase prosperity: investments in education, infrastructure and technology.

If public officials are obsessed with job creation, they have good reason. As Gallup Chairman Jim Clifton writes in "The Coming Jobs War," "Six years into our global data collection effort, we may have already found the most searing, clarifying, helpful, world-altering fact. What the whole world wants is a good job." Creating good jobs is never going to be easy, but it's through the work of organizations like Good Jobs First that the truly effective approaches are going to be found.

Good Jobs First just turned 15 years old. May it live long and -- along with America's regular, hard-working folks -- prosper.

Mark Funkhouser  |  Director, GOVERNING Institute
mfunkhouser@governing.com

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