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Tax Incentives: The Ugly Truth

What’s the real ROI on state and local tax incentives? Not much. By Nancy Clarke | Digital Exclusive - 2020

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Not long ago, Amazon announced its search for a second headquarters location. Cities across the U.S. raced to roll out the red carpet for the tech giant. From producing wacky videos to offering free local sandwiches—and in the case of Tucson, Ariz., sending a giant cactus to Amazon’s Seattle headquarters—each pitch had its unique spin. But while each city’s efforts to outdo the competition made headlines, all had something in common: tax incentives.

Tax incentives, at their most basic, are tax breaks offered to specific businesses in hopes of gaining jobs and stimulating the local economy. Many cities offered enormous concessions to Amazon thinking the company would bring more customers to existing local businesses, offer high-quality jobs to the local population, and overall boost the economy of the city—and maybe even of the state.

That’s how tax incentives are supposed to work. But recent research shows that while tax incentives cost local government big bucks, they often don’t impact either the recipient or the local economy as intended. In fact, tax incentives are more likely to damage local economies than to boost them. Here are the numbers behind tax incentives:

A huge expense for local government

In 2004, in a paper for the Journal of the American Planning Association, researchers Alan Peters and Peter Fisher estimated that state and local governments offered approximately $50 billion in tax incentives. “[This] almost certainly is much more than spending on all state and local economic development initiatives combined,” Peters and Fisher wrote. With such a large investment, you would certainly hope for significant returns.

A small consideration for large companies

Though tax incentives come with a big price tag, that doesn’t translate to big savings for large companies looking to relocate or invest. On a major corporation’s balance sheet, state and local taxes are likely to make up as little as 1.8 percent of all business costs, according to a 2012 report from Peter Fisher and the Iowa Policy Project—simply too small a number to drive decision-making. In fact, Peters and Fisher estimate that roughly 90 percent of these companies’ hiring and investment decisions would have been made with or without the tax incentives.

A big mistake

If that doesn’t convince you that tax breaks are bad news, the negatives continue to pile up. New research from Cailin Slattery and Owen Zidar found that there’s simply no evidence that these tax incentives work. In their 2020 paper, “Evaluating State and Local Business Tax Incentives,” Slattery and Zidar stated, “[W]e do not find strong evidence that firm-specific tax incentives increase broader economic growth at the state and local level.”

When a company does move to a state or city offering tax breaks, it costs the local government significantly while not impacting the company’s bottom line. Additionally, the local government usually points to any new jobs as evidence the incentive is working, but that growth often comes at the expense of local businesses. It’s also almost impossible to ensure that any growth is kept within the city or state that’s offering the tax incentive.

The ugly truth is that while tax incentives may seem like a good idea and are still utilized by many states and cities to woo large and trendy businesses, all evidence shows that the return on investment is simply not there. Even when new jobs are created and filled by local workers, it comes at the cost of existing local businesses, local infrastructure, and public resources. While the possibility of reinvigorating a stalled local economy is enticing, local governments can likely find much better ways to invest their money than offering tax incentives to major corporations.

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