Tim Bartik says incentives used by state and local governments to lure companies or encourage them to expand are not free. The Senior Economist at the Upjohn Institute for Employment Research says it’s important to find out if the benefit of those incentives is worth the cost.
Bartik’s latest report for the Upjohn Institute is called Who Benefits from Economic Development Incentives? He says it’s important to look beyond the sticker cost of tax breaks offered to companies. Bartik says there are also “opportunity costs,” because a tax abatement for one company means higher taxes for someone else, or less money spent on public services.
Asked what about the most effective types of incentives, Bartik says it’s important to have high multipliers, where the jobs created lead to other jobs. He says that can happen through suppliers to the company receiving the benefit, or from positions that pay high wages. However, Bartik says cutting services such as education, is not worth the short-term gain of more jobs. He says that in the long-term that will leave a workforce without the skills needed to the fill jobs.
An alternative can be raising taxes on other businesses to pay for incentives. Bartik says that may be a better option. He says tax incentives are often used for “export-based” companies that will bring new dollars into the economy by selling products elsewhere. Bartik says those businesses are more sensitive to taxes than businesses that sell locally, such as fast food restaurants. Bartik says a local or state government raising taxes on other businesses also shifts some of the tax burden onto businesses whose owners live elsewhere.
Bartik says state and local governments may be wise to “front-load” tax benefits for businesses. He says a tax abatement in year 11 of an investment isn’t likely to influence a location decision. Bartik says the reason to stretch out the incentives is not economic, but political. He says a politician offering a tax break stretched out over a decade or more is probably giving away some of their successor’s tax base. Bartik says paying for incentives up front is a reality check for policy makers. But he says it also requires agreements on paying back the incentives if the company, and its jobs, leave later.
Large tax incentives for companies like Foxconn and Amazon tend to get a lot of attention, but Bartik says other programs like customized job training can be quite effective. He says programs developed with a community college may help smaller companies that are not able to offer the job training they need. Bartik says those programs come at a lower cost, and can help small and medium sized businesses.
Bartik says it’s important to resist the lure of short-term benefits, and to debate long-term effects. He says paying for incentives by cutting money for education will have a negative impact down the road. Bartik says policy makers can seek immediate benefits, but he says they should be careful not to mortgage their future.
