Politics

Making Work

A new study suggests that state and local tax incentives for existing businesses don't create new jobs.
by | June 2003
 

The torrent of announcements, press releases and gubernatorial statements on economic development keeps coming: companies expanding, companies arriving, jobs being created, tax revenue being increased-- all, we're told, because of carefully crafted economic development programs and the wise use of tax dollars to encourage business investment.

Skeptics have always questioned the job-creation statistics in this gush of press releases and reports, and now there is at least one piece of evidence suggesting that the skeptics are right. A new article in the Journal of Regional Science--written by Todd Gabe of the University of Maine and David Kraybill of Ohio State University-- takes a critical look at the effect of one state-level economic development program.

Gabe and Kraybill did a statistical analysis of 366 Ohio companies-- existing companies, not new companies--that expanded between 1993 and 1995. Some of them received financial assistance from the state economic development program; some did not. And the results are both remarkable and remarkably clear: Providing financial incentives to existing businesses makes little difference in creating jobs. In fact, based on a regression analysis, the two professors found that, on average, businesses accepting financial assistance created fewer jobs than they would have created if they had not accepted financial assistance.

This is not news that economic development professionals want to hear, of course, and the study has been roundly criticized by state officials. But Kraybill says he also has heard from a number of economic development people who don't like the incentive game and are reassured by evidence that subsidies don't matter much. And that's not surprising, either, because the study highlighted another unfortunate reality in the economic development business: the tremendous pressure to justify one's existence by pumping up job-creation numbers.

Gabe and Kraybill not only looked at the number of jobs actually created but also compared that with the number of jobs estimated at the time the business expansion was announced. What they found was telling. The businesses that did not accept economic development incentives announced expansions averaging 45 workers--and hit the target exactly. But the businesses accepting incentives announced expansions averaging 91 workers--and expanded by only 51 workers. In other words, the businesses taking state money announced much more ambitious plans to add workers but came in at about the same level as the businesses that didn't take state money.

This is a finding that ought to send a chill down the back of every state economic development director, because it calls into question all those job-creation numbers contained in all those press releases and gubernatorial announcements and thick state reports on economic growth. Whenever State X or Governor Y announces that the state has created 10,000 or 40,000 or 100,000 jobs, those numbers are usually based on the announced estimates--not actual results.

At a time when state budget directors are looking for every dollar they can, we're beginning to see big fights over whether economic development programs are vital to restoring economic health or expendable because they don't do anything. In California, for example, the Trade, Technology and Commerce Agency has taken a 70 percent budget cut, and most economic development functions have been transferred to a tiny research section of the governor's office. There's also talk of demoting it from a Cabinet-level department. This kind of battle will go on in statehouses across the nation this year and next. Placing job creation numbers in serious question is likely to empower the budget directors in their search for more items to redline.

Gabe and Kraybill are careful to clarify that their study dealt only with Ohio, and only with expansions of existing businesses--not new businesses that have been lured to a state through economic development incentives. The results might be different in other states and might have been different for new businesses. But their conclusions certainly fit into a long line of research suggesting that money--whether financial incentives or tax breaks--is not the most important factor in determining where businesses locate and whether they expand.

Availability of labor, quality of life, proximity to certain pieces of big-ticket infrastructure such as airports--all these things matter far more than money. But they are much more difficult to quantify and much less fun for politicians to deal with. In politics, pork is a currency that everybody understands, and a well-respected measurement of whether or not you are "delivering" for your constituents. Based on Gabe and Kraybill's study, however, it would behoove our governors to focus less on delivering pork directly to the factory owners, and more on putting the pork into labor training, infrastructure and the other things that businesses really need to thrive.

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