At MLC committee meeting, legislators urged to more closely scrutinize tax incentives

Stateline Midwest ~ 2013 MLC Annual Meeting Edition

When it comes to economic development, investment does not necessarily equal performance. This was one of the themes heard at the Midwestern Legislative Conference’s Economic Development Committee meeting in July.

A topic of particular interest was the value of state business incentives. States spend up to $80 billion on incentives in hopes of attracting or keeping businesses — and the jobs and economic activity that come with them.

But Peter Fisher, research director for the Iowa Policy Project and professor emeritus at the University of Iowa, cautioned that these incentives (such as tax cuts and credits) are often arbitrary and possibly unnecessary.

“The majority of location decisions are driven by something other than incentives,” he told lawmakers who attended the meeting.

Other critical factors include the pool of skilled and qualified workers; the quality of schools and other local amenities; access to markets and suppliers; the quality of state and local government services; and other business costs (such as transportation, wages and energy).

According to Fisher, the goal of economic development policy should be to raise a state’s overall standard of living — bringing higher income levels, lower poverty rates and greater economic security.

To the extent that business incentives do not do those things, he said, policymakers should focus on other areas that have a greater impact on business and job growth.

“Tax cuts or tax incentives do not pay for themselves,” Fisher said. “Cuts in [state] revenue from firms [that] get incentives but didn’t need them will exceed the gains from any new investment induced by incentives.”

He urged legislators to ensure that their states are maximizing the cost-effectiveness of taxpayer dollars. Part of that comes through state laws that call for a stringent cost-benefit analysis of incentive programs.

He also said states should take a more targeted approach — for example, focus on “footloose” economic sectors (those not constrained by location), businesses that offer quality jobs, and tax policies that make the state more inviting for high-growth, innovative firms.