PART I: WHAT ARE INCENTIVES?
PART II: WHY ALL THE INCENTIVES?
PART III: HOW TO TALLY THE IMPACTS?
In the previous two parts of this blog, I wrote mainly about the rationale for incentivizing/subsidizing development projects and provided current snapshots of both the use and reporting of tax incentives. This last part focuses on the process and impact, not just ex poste impact of live projects but also impact predictions during decision-making. In the past, I have published some impact analyses using actual data -- specifically the impact of property tax abatements on school finances -- so here I would stay with more general factors to consider when conducting cost-benefit analysis.
Let's start at the beginning: state governments enable certain local governments to abate taxes for economic development; these aren't exactly tax breaks you might claim on returns, but rather companies typically go through an application and review process, during which impact analyses and negotiations may be conducted. The typical arrangement is for approved applicants to pay less taxes for a number of years in exchange for a certain number of new jobs paying certain wages accompanied by certain levels of investments.
To predict or evaluate the impact, convential economic analyses would look at new jobs, values, and tax revenues that would be or have been, respectively, generated directly and indirectly through multipliers. Given how key all these indicators are for deciding whether tax dollars are being put to good use through incentives, you would be surprised that many programs don't require the agency to disclose how many jobs are promised and created. Consideration for the added value implies that the industry matters -- that governments get different returns from subsidizing different sectors or type of industrial/commercial activities. For example, subsidizing the films and sports stadiums generally doesn't pay since often companies/activities leave after a production or event, and there have indeed been many studies (example) showing the bad business of these particular business incentives.
Last to consider is the tax revenues. This figure gets us closer to figuring out the social costs of tax incentives, if we can contextualize it in local finances and public service economics. Here we can pinpoint a source of the power asymmetry referenced previously between large corporations and community planners or advocates. For most companies, property tax is indeed a huge item on the bill, but it still accounts for a very small percentage of the total operating expenses. Meanwhile, half a million dollars in foregone revenues could go a long way in a poor community. Most school districts depend on property tax to provide often the most expensive public service, K-12 education, that tax abatements could cause serious burden. Opportunity cost analysis often converts the cost figure into the number of teachers that can be hired or extent of infrastructural upgrades.
There is also a spatial dimension and a temporal dimension to the story. Both the use and impact of tax incentives are geographically uneven. Research has shown that distressed localities are particularly driven to lure investment with incentives, but if the deal doesn't pan out, abating taxes won't help with the fiscal stress. For example, Kansas City Public Schools is openly opposed to the Missouri city's incentives that disproportionately hurt disadvantaged kids. And if things do work out economically, benefits tend to spill out into neighboring jurisdictions who did not pay for the investment. In some cases, tax abatements have been linked to increased gentrification. In terms of time, proponents of tax incentives would argue that these investments will pay off in time, but we are often looking at 20-30 years of breakeven period, and that's many students affected in the meantime.
All this is to say that for all the incentives we use, we do not scrutinize them nearly enough. There are many factors beyond just jobs to consider, and even jobs we don't know half of the story due to lack of transparency. What we know is that some school districts are feeling the harm, and that implications for social equity are not promising. To make incentives work better and hurt less, it's important that governments establish independent auditing committee to evaluate the net impact, protecting certain critical streams of funding (like the one for public education) from abatements, and removing barriers to open information.
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