States’ Job Creation Shell Game

States spend billions of dollars on tax breaks and other incentives to woo companies. Unfortunately most of this money ends up in firms’ pockets and few new jobs get created.

State and local governments dole out billions of dollars annually in taxpayer-financed deals to businesses in the name of economic development.

Earlier this year, the State of Massachusetts and the City of Boston offered property tax breaks and grants totaling $145 million to General Electric in exchange for the company moving its headquarters to Boston from Connecticut.

In 2014, the State of Nevada outbid Arizona, California, New Mexico and Texas with an offer of free land, tax cuts, electricity discounts and other perks to lure the auto manufacturer Tesla to build a battery production facility in the state. The factory and its 6,500 jobs were estimated to cost Nevada more than $1.2 billion.

Many states, including Texas, New York and Louisiana, fund “war chests” specifically aimed at bringing companies and jobs to their state, often poaching these firms from other states. All told, estimates indicate this game of tug-of-war among states costs taxpayers $70 billion a year – while creating very few, if any, new jobs and lining the pockets of the companies taking advantage of these incentives.

Supporters claim programs like these bring new business activity and employment opportunities to residents of the state. Yet, research has found that rather than paying for new jobs and growth, taxpayers are funding business activity that would have likely occurred anyway. In other words, a small subset of businesses (usually large ones) profit at taxpayers’ expense for hiring or expansions the businesses already had planned.

Studies funded by the Ewing Marion Kauffman Foundation took an in-depth look at the flagship business incentive programs in two states: Kansas and Missouri. The findings were striking.

States spend as much as $70 billion a year on tax incentives that often don’t create new jobs.

In Kansas, the almost $1 billion spent from 2006 to 2011 on the state’s  incentive program had no impact on job creation. Businesses that received an incentive were no more likely to create new jobs than those firms that did not receive an incentive. Moreover, in a survey of 24 recipients of incentives, two-thirds of firms indicated they would have invested even if they hadn’t received an incentive.

Across the state line, companies in Missouri created between one and two jobs per incentive. While this may seem like good news, it amounts to an incredibly costly job creation strategy, with each of these jobs costing Missouri taxpayers $1 million.   Over $700 million in incentives were spent to create a few hundred jobs.

These findings reveal a fundamental flaw in incentive programs: they are redundant. But they are also expensive, encourage states to allocate resources away from other critical needs (such as education), create potential for corruption, and promote a job creation shell game in which businesses move a few miles across state borders to qualify as “new jobs” without creating new job opportunities.

In response to critiques like these, some states have implemented “clawback” provisions that allow the state to recoup some or all of the taxpayers’ money when a company fails to keep its job creation promises.

But other states are starting to just say no. In Florida, the legislature recently rejected a request from the Governor for $250 million to fund the Quick Action Closing Fund, which Florida uses to lure companies to relocate to the state. More states should do the same.

In a time of extreme polarization of American politics, there are few policy areas where both sides can agree.  Call it “corporate welfare” or “big government picking winners and losers,” but the labels are less important than the policy implications. Incentive programs provide a transfer from taxpayers to companies for little societal benefit.

Nathan Jensen and Jason Wiens

Nathan Jensen is a professor in the department of government at the University of Texas-Austin. Jason Wiens is policy director at the Ewing Marion Kauffman Foundation.