States Reviving Incentives for Firms to Relocate

With revenues up, state officials are again courting companies considering moving in or expanding. But it'll be tough to prove the lures actually pay off.

State and local governments will dole out billions this year to entice business to locate in their jurisdiction, despite growing concerns about whether such programs are worth the money. States are expected to shell out $80 billion in tax forgiveness and other financial incentives to companies this year. Direct state economic development expenditures, which don’t include tax forgiveness, totaled about $7.3 billion in fiscal year 2012, according to the Council for Community and Economic Research.

Texas will lead the pack in spending on company incentives and tax forgiveness, with about $20 billion used to attract businesses to the state. Texas Gov. Rick Perry (R) recently toured California to promote the Lone Star State’s fiscal record, zero income tax and unemployment rate to potential businesses. Alaska, West Virginia and Nebraska are likely to put up the most money per capita to attract jobs this year, while Oklahoma and West Virginia will give up about one-fifth of their budgets in incentives for economic development.

Such development programs took a dive during the Great Recession, as revenues from state income, sales and corporate taxes shrank. But states are coming off the recession and "the revenue picture has gotten noticeably better," says Sujit CanagaRetna, senior fiscal analyst at the Council of State Governments. With an expected 4% increase in revenue this year, following a 4.2% gain in 2012, state governments are once again jumping on the incentives bandwagon, providing companies willing to move jobs to their state with a variety of financial goodies.

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But states will be competing against each other for a smaller number of deals. While the number of corporations looking for new locations has rebounded slightly from a dip in 2008 and 2009, it’s still 60% lower than at its peak in 1999. So, more often than not, job growth for one state is coming at the expense of jobs in another state.

Job attraction and retention is particularly competitive in metro areas that span state lines, such as Memphis, Charlotte and New York. In some cases, new-job subsidies are being used to steal jobs from neighboring states. Greg LeRoy, executive director of Good Jobs First, a nonprofit, nonpartisan research center based in Washington, D.C., points to the Kansas City metro area as an example, noting that "the economic border war there is intense and escalating."

Last year, Kansas City, Missouri, lured Freightquote, an online transportation broker of freight services, and its 1,225 jobs, from Lenexa, Kansas, just 12 miles away. None of the jobs were new to the metro area, but the move cost Missouri $64.3 million in city and state incentives. AMC Entertainment and Teva Neuroscience each got more than $40 million in 2011 to go the other way — from Missouri to Kansas.

As a result of the cross-border competition, state and local governments are wasting billions of dollars each year on economic development subsidies, according to a recent report by Good Jobs First. They’re doling out funds to companies for simply moving existing jobs from one state to another, rather than focusing on the creation of truly new positions, though CanagaRetna says this type of situation is more the exception than the rule. He points instead to foreign automakers, including Honda, Hyundai, Volkswagen and Nissan, all of which opened new plants in Southern states, including Alabama and Tennessee, with the help of economic incentives.

There’s little evidence that more spending is actually producing new jobs that wouldn’t otherwise be created. Indeed, there’s some evidence that shows just the opposite. A study by Minnesota auditors, for example, found that about 80% of the jobs created by companies receiving state employment incentives would have been created without a helping hand from the state. And in Nebraska, a recent report showed that jobs created with the state’s Advantage Act economic development incentives cost taxpayers as much as $235,000 each.

And measuring the success of such programs is unquestionably difficult. Deals that span multiple years and varying economic climates can skew measurements. And other government policy changes — in tax rates or minimum wage requirements, for example — will impact the success of job-creation efforts.

To get a clearer idea about whether they’re getting good bang for their bucks, more states are looking for better ways to measure the impact of economic development incentives. "The economic impact studies have gotten a lot more sophisticated," says CanagaRetna, who adds that the additional cost-benefit analysis is important for policymakers trying to craft legislation providing for the funds. Some states, including Florida and North Carolina, are even going after distributed funds when the promised results aren’t delivered.

At present, about half of the states have some kind of systematic measurement or assessment of their investments, says the Council for Community and Economic Research. Lawmakers in Florida are considering new disclosure and accountability requirements for the Sunshine State’s economic development programs. Michigan Gov. Rick Snyder (R) has proposed eliminating the incentives for companies moving to the Great Lakes State altogether. Other metro areas…Cleveland, Denver and San Francisco…are signing on to revenue-sharing, collaboration and anti-poaching agreements.

Karen Mracek
Associate Editor, The Kiplinger Letter