Economic Development

States Double Down on Incentives to Woo Companies

In the wake of the recession and the long, slow recovery from it, state and local governments have been even more eager to offer incentives to the few projects they have hopes of landing.
by | January 2013

It didn’t play in Peoria. Local and state officials tried to put together a generous incentives package to persuade an Egyptian company to build a $1.4 billion fertilizer plant in Peoria County, Ill., but their efforts failed thanks to $130 million worth of tax incentives and property tax write-offs offered by the state and localities over in Iowa.

Given the state’s chronic budget problems, a majority of Illinois legislators couldn’t be persuaded to surrender that kind of cash. But the fact that the plant went elsewhere shows why states have been throwing money at businesses and developers. “Economically, it’s hard to unilaterally disarm,” says Kenneth Thomas of the University of Missouri-St. Louis. “If you don’t give incentives, you are going to lose investment.”

In the wake of the recession and the long, slow recovery from it, state and local governments have been even more eager to offer incentives to those few projects they have hopes of landing. Nine of the top 25 incentive packages over the past decade were for projects in 2010 and 2011 alone, showing that states had grown “desperate” during that time, Thomas says.

Over those two years, he notes, there were 21 incentive packages worth more than $100 million -- compared to just three such deals within the European Union. A recent analysis from The New York Times found that subsidies from state and local governments have become an $80 billion-a-year gift to the private sector.

Governments have entered into a spiral of higher subsidy values, not just in terms of the amount of money they’re offering, but also in the ways deals are structured. States such as Illinois, Kansas and Nevada now issue STAR bonds, which stands for “sales tax anticipation of revenue.” What that means in English is that rather than giving tax breaks over a 10- or 20-year period, governments issue bonds and hand the developer or the company cash up front.

That can create all sorts of problems. The money given to private companies is worth more, since it’s not spread over time and subject to inflation. And it makes it difficult for states to penalize companies that don’t make good on their promises to deliver jobs or maintain wage standards. It’s harder to claw back incentives that have already been handed out, after all, than not to award them in the first place.

There’s plenty of evidence that tax incentives aren’t economically productive. The Lincoln Institute of Land Policy released a study last year that showed property tax breaks are costing states and localities $10 billion a year, but do little to effect economic activity or create new jobs.

Still, as long as neighboring communities and states are willing to play the incentives game, states and localities will keep ponying up. Illinois state Rep. Fred Crespo’s challenger complained about a $150 million property and income tax credit he’d sponsored for Sears, saying that the “deals takes millions of dollars away from a school district to essentially give to a big corporation.” But Crespo noted the legislation had wide support and required Sears to maintain more than 4,000 jobs locally. Crespo won.

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