Business Incentives Not a Stimulus for State Economies

Capitol Ideas Growth and Prosperity Special Edition / April 21, 2011

If state and local governments eliminated all their corporate taxes, it would help businesses cut just 2 percent of their costs.

That illustrates the point Bob Tannenwald, senior fellow at Center on Budget and Policy Priorities, made during The Council of State Governments’ Growth and Prosperity Virtual Summit session, “Winning Strategies of Job Creation.” Tannenwald said corporate tax incentives do not help states as much as people think.

“In fact, tax cuts and tax credits do not stimulate state economies that much,” he said.

And, Tannenwald said, states end up paying more because they must cover the loss of that tax revenue to fund things that companies do value, such as good schools, top-performing colleges and universities, modern roads and bridges, and low crime rates.

“If you tax things less, you have less to finance public services that businesses value,” he said.

Greg LeRoy, executive director of the nonprofit Good Jobs First, said if states choose to offer tax breaks as economic development incentives, they should incorporate some reforms to achieve fairness. The first reform is disclosure; states need to show openly the incentives a business received and the benefits those incentives brought.

He also suggested states include a clawback provision in the incentives package—if a business fails to produce a prescribed level of public benefits, it must repay the incentives. At least 19 states have such provisions in their statutes, LeRoy said.

In addition, LeRoy said states should work to ensure good job-quality standards are tied to the company’s industry with regard to pay and health care. Forty-three states have such a rule for at least one of their incentive programs, he said.

The Great Recession has brought the issue of economic development incentives “to a very sharp point in 2011,” LeRoy said, because while recovery has begun, state and local tax revenues lag job recovery.

“States are being forced to make very painful budget decisions,” he said.

Even states like Florida, which usually enters a recession last and recovers first, are looking for new ways to develop the economy. Florida has a strong international component for economic development, said Manuel Mencia, senior vice president/chief operating officer for Enterprise Florida and president of SIDO, a state trade promotions professionals group that is an affiliate of The Council of State Governments.

“We have seen international business as a vital element to Florida’s recovery,” he said.

Enterprise Florida is a coalition of groups working in partnership to significantly increase the state’s footprint in the international marketplace. Mencia said more than 60 percent of Florida’s economy is international, and 50,000 Florida businesses engage internationally.

States can benefit from foreign investment, Mencia said, because not only do foreign companies pay 18 percent higher wages and are 12 percent more profitable, but they also may offer more stability.

“The reality is that developing economies are going to grow for the foreseeable future,” he said. “Companies that do business internationally are better able to weather domestic and seasonal downturns.”

LeRoy said Good Jobs First likes export promotion because it benefits many different companies.