Meet “Dirty Dozen” Tax Break #3: Regional Economic Development Incentives

Blog Post by: Benjamin Landy , on December 12, 2012

In 2002, The Century Foundation convened the Working Group on Tax Expenditures to examine and propose reforms to the tax code. The resulting report, Bad Breaks All Around, identifies twelve tax breaks with little or no economic justification. These "dirty dozen" are no less ripe for the chopping block a decade later, as Congress finally takes up the task of simplifying the tax code. Follow along at Blog of the Century and on the "Dirty Dozen" expenditures homepage as we reintroduce each of the "dirty dozen" and explain why it's long past time to eliminate these costly tax breaks.

Incentives for regional economic development have long been used by state and county governments to stimulate local economic growth and to encourage business relocation. This common practice escaped media scrutiny until the 1980s and 1990s, when interest in regional incentives grew in response to a number of high-profile bidding wars between states and towns to attract new businesses, particularly automobile manufacturing facilities. But while interest in these tax breaks—and the size of the tax breaks themselves—has grown over the years, most research on the exact size and effectiveness of these expenditures has been inconclusive or otherwise unsatisfactory.

It was for that reason that The Century Foundation's 2002 Working Group on Tax Expenditures recommended eliminating most tax breaks for regional economic development, particularly the federal subsidies for Empowerment Zones and Enterprise Communities: a now-defunct HUD/USDA designation that allowed "highly distressed" urban and rural communities to qualify for a special combination of grants, tax credits and other benefits worth an average $1.1 billion between 2002 and 2011, when the program expired. According to OMB budget analysis, these subsidies will continue to cost hundreds of millions in deferred tax credits as the program is phased out. When combined with other federal incentives for regional development, like the New Markets tax credit and the exclusion of interest for airports, docks, and other similar bonds, the total cost amounts to between $2 billion and $3 billion annually in foregone tax revenue.

Tax breaks for regional economic development

Unfortunately, expiring federal incentives for regional economic development, like the Empowerment Zone Program, are just the tip of the iceberg: recent research suggests the vast majority of wasteful business tax expenditures are offered at the state and local level. According to a recent three-part series from the New York Times, states, counties and cities now spend over $80 billion through the tax code each year to attract business.

Yet that number, already an order of magnitude larger than the estimated federal expenditures for regional economic development, likely understates the full extent of the corporate-state subsidy complex. The Times investigation, which "examined and tallied thousands of local incentives granted nationwide," concludes that the actual costs may be even higher, as few of the thousands of involved government agencies and officials reported knowing the value of their awards, what companies did with the money, or how many jobs were created. "Even where officials do track incentives," note the report's authors, "they acknowledge that it is impossible to know whether the jobs would have been created without the aid."

Anecdotal evidence within the article suggests a zero-sum bidding war between regions that generates zero net job creation, as in the example of a "border war" between Kansas and Missouri:

Soon after Kansas recruited AMC Entertainment with a $36 million award last year, the state cut its education budget by $104 million. AMC was moving only a few miles, across the border from Missouri. Workers saw little change other than in commuting times and office décor. A few months later, Missouri lured Applebee’s headquarters from Kansas.

Indeed, follow-up analysis from economists Richard Florida and Charlotta Mellander for The Atlantic Cities confirms "virtually no association between economic development incentives and any measure of economic performance."

But just as politicians in the 1990s pushed for harsher and harsher sentencing laws in order to avoid appearing "soft on crime," so do today's politicians find themselves locked into a system of symbolic one-upmanship in a never-ending effort to signal increased willingness to fight for local jobs and economic growth.

"If you've got some states doing it, it's hard for the others not to do it," said one former governor who has called for a truce. "It's like unilaterally disarming."

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