State political leaders looking for positive economic press often dish out lavish packages of tax breaks to attract corporations to their soil. But that approach to job creation gets it backward, new research indicates.
Take the high-profile January announcement that General Electric will relocate to Boston from Fairfield, Connecticut, for example. GE’s relocation will bring 800 white-collar jobs to Massachusetts. The state is paying a reported $120 million in grants and other incentives for the privilege. Boston itself is tossing in another $25 million in property tax breaks, for a total of about $181,000 per job in publicly-financed incentives to a company with $130 billion in annual revenue worldwide.
But how much good do such interstate relocations really do to the job markets of the state that wins the race to the bottom on corporate taxes?
Barely 13 percent of all net job creation in any given state in any given year comes from out-of-state businesses either relocating from one state to another or expanding into new states, research from the Center on Budget and Policy Priorities shows. Pure relocations such as the GE move “typically represent only 1 to 4 percent of total job creation each year, depending on the state,” economists Michael Mazerov and Michael Leachman write in the report. The overwhelming majority come from home-grown firms rather than those lured across a border.
“We’re not saying they should ignore [out-of-state firms looking to move], but there’s not a lot they can do to influence it,” Mazerov said in an interview. “They should focus on entrepreneurship and they should focus on helping their existing in-state firms to survive and grow. It’s a matter of priorities not a matter of ignoring [out-of-state companies].”
Even policies that seem like across-the-board stimulus to the business community rather than sweetheart deals with particular CEOs are often ill-suited to the startups and fast-growing young firms that actually drive state job markets, the economists note. Lowering income tax rates doesn’t do much for infant businesses that have very little taxable income in the key early years of their lifecycle.
Because of balanced budget requirements in most states, those governments are even more constrained than their federal cousins in how they allocate scarce budget resources. So when a legislature opts for giveaways to lure flashy brands to relocate or expand, they forgo other policies that would benefit the home-grown firms that generate nearly all job growth.
“There’s a lot of promising evidence about some of these new business accelerators that combine not only a physical facility for startups, but include intense mentoring and financial assistance,” Mazerov said. “Our message is, focus on the basics: Make sure you have good education systems, for instance, so when an entrepreneur starts a business in your community and needs to attract workers the local schools are good enough that people will want to come.”
Kansas, for example, has hollowed out its budget resources through broad income tax cuts that are poorly targeted to actual employers, and left itself with a gigantic underfunding crisis in its public schools. Underpowered schools don’t just deprive children of opportunity; they also undermine the very in-state startups that will create roughly six in every seven jobs gained in a given year.
The evidence is even dimmer for the kinds of targeted tax deals that brought GE to Boston. Prior research indicates that nothing good comes when states twirl their budgets into elaborate yoga poses to lure a restless company away from a neighbor.
Most of those businesses “would have been happy to locate in your state anyway,” economists Alan Peters and Peter Fisher concluded in a broad 2004 study of state tax incentives to business. Instead of buying significantly improved job prospects for their taxpayers, these expenditures “simply produce an unending merry-go-round of tax cuts and subsidies whose net effect is to starve government of the resources it needs to finance the services it should be providing,” they wrote. A 2013 study from the Institute on Taxation and Economic Policy arrived at similar conclusions.
Despite these well-documented failings, states don’t even bother to keep track of how that merry-go-round functions, according to a 2012 Pew Trusts survey. The lack of credible data to support these giveaways doesn’t stop politicians from using the headline-grabbing deals for positive press without following through to find out if their decisions did any good.