Cutting Taxes Best Way Out Of Business Incentive Game
The Ohio economy has fared well since the economic slump of the early 1990s. Ohio’s job growth out-paced the nation in 1994, the unemployment rate is currently one of the lowest in the nation, and the state ranked first in the number of new and expanded facilities from 1992-94 according to Site Selection Magazine.
The Ohio Department of Development credits this success to its ability to provide incentives for businesses to invest in Ohio. The “bleeding has stopped,” says Donald Jakeway, the department’s director. He believes Ohio’s tax incentive programs are an important reason why. But the economic benefits of giving individual companies tax relief is far from a proven economic development strategy.
First, few companies benefit from the programs as less than two-tenths of one percent of Ohio’s companies received state assistance in 1994. Second, even when they get government assistance, firms do not always follow through on their end of the agreement. Companies that aggressively bargained for incentives and failed to live up to their agreements have burned Pennsylvania, North Carolina, and Michigan.
A three-year comprehensive review of companies receiving state assistance in Ohio found that eight had gone out of business despite receiving more than $1.4 million in state assistance. These companies had pledged to create 336 jobs and retain another 266. Nineteen other firms were still in business, but failed to create the jobs they promised. After being given almost $12 million in state subsidies, only 29.2 percent of the jobs they pledged to create had materialized.
Even though most companies follow-through on their commitments, the gains may be illusory. No one can know for sure that a particular expansion was a result of the incentives or would have occurred anyway. Many companies have learned to game the system, using competing bids from other states to sweeten deals from states in which they have already decided to locate. While Ohio development officials try to minimize this type of economic brinkmanship, this kind of strategic behavior is inevitable. Of course, companies receiving incentives also tend to be footloose: Firms that respond to incentives once tend to respond again. So the apparent fact that they influence business decisions is a blessing and a curse intertwined.
Most of all, however, the incentive game is unfair to Ohio businesses that cannot, or do not, want to relocate to another state. Alabama, for example, outbid two other states last July for a new steel plant that will compete with a pre-existing Alabama facility. The same thing happens in Ohio. Assistance goes to firms willing to locate in the state. Meanwhile, loyal Ohio businesses subsidize these competitors through higher taxes.
But these arguments mean little to individual states embroiled in high-stakes economic development. “Unilateral disarmament” is believed to be economic, or at least political, suicide. Unless they ante up, states reason, others will ravage their economic bases. “Until the 49 other states lay down their weapons in the war between the states,” notes Jakeway, “Ohio is going to continue to meet the challenges created by this competition.”
As economic development tools, these programs have become an expensive admission price to a game that few can win. Ohio gave more than $425 million to companies agreeing to expand or locate in the state from 1991 to 1994. But a 1993 move by the National Governor’s Association to coordinate self-imposed limitations by states stalled.
What should Ohio do? A viable escape route would be to give tax abatements to everyone in equal measure. In other words, cut taxes. State government needs to pursue public policies that promote economic growth and increase the living standards of all its residents. Selective development incentives are the wrong route to the right destination.
The way out of the escalating no-win incentive competition is to create an environment conducive to economic growth by lowering tax rates in equal measure for all businesses. Then watch other states scramble.
Samuel R. Staley, Ph.D. is a senior fellow at the Buckeye Institute and director of Urban and Land Use Policy at Reason Foundation in Los Angeles. An Ohio native and resident, he is co-author of the forthcoming book Mobility First: A New Vision for Transportation in a Globally Competitive Twenty-first Century (Rowman & Littlefield) and co-author of The Road More Traveled: Why the Congestion Crisis Matters More Than You Think, and What We Can Do About It (Rowman & Littlefield, 2006).
