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Jobs, Growth and the Dubious Worth of Tax Incentives

As studies from Missouri show, there are good and bad ways to measure the impact of this economic development tool.

Tiny businessman people pulled between hands, one with cash money.
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.

A very different process unfolded on the other end of the state. This August, Kansas City leaders delivered on a promise made years ago to study economic development incentives. The report was a disappointment. Researchers merely tallied up the value of the incentives offered and any job/wage/population growth that happened afterward. There was no effort made to determine how much of the growth happened because of the incentives -- researchers just assumed that all of the growth was attributable to the incentives. They therefore concluded that "each incentive dollar invested generated $3.83 in additional tax revenue."

For a uniform examination of incentives, last year the Show-Me Institute turned to William Lester of the University of North Carolina at Chapel Hill, who previously researched tax-increment financing (TIF) in Chicago, to study the likelihood that Missouri incentives are driving development. Lester and his associate Rachid El-Khattabi examined the period from 1990 through 2012 in both cities, looking at employment, business counts and sales figures down to the census block. Perhaps most importantly, these researchers compared areas that had received TIF subsidies against similar areas that had not. They found no great differences in changes over time, indicating that it was not the TIF program that was creating economic growth. "Overall," they concluded, "the analysis conducted in this study finds no support for the claim that TIF generated tangible economic development benefits in either Kansas City or Saint Louis."

The lesson to be drawn from these studies is clear: Policymakers must insist on meaningful and independent measures of the extent to which incentives are driving development. Much can be done on the front end to examine the real need for subsidies. Policymakers should also insist on regular reviews of performance, meaningful measurement of job creation, and the ability to terminate underperforming incentive programs and return the accrued taxes to the affected jurisdictions.

Until cities and states adopt meaningful reforms, we can expect developers to continue asking for taxpayer subsidies whether the need is real or imagined. And as long as politicians are willing to oblige the developers, taxpayers will be all the poorer.

Director of municipal policy at the Show-Me Institute
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