The time-honored swap of millions of dollars in tax breaks for the promise of thousands of jobs is under more scrutiny as states slash spending to shore up their budgets.
Missouri lawmakers pushing for caps on state tax credits to businesses are holding up Gov. Jay Nixon’s proposal to reward more companies that hire employees at a decent wage with health benefits.
“All states are now buying jobs, you have to be in it,” said Missouri Sen. Brad Lager. “But we only have a handful of tax credits that have caps.”
Last year Missouri spent $170 million on historic preservation tax credits, which are not capped — slightly more than the state paid out for all of its 19 community colleges.
Ohio is banking on expanding tax breaks for companies that create or keep jobs. New Jersey wants to reward companies with $3,000 for each new employee hired.
Florida, facing a roughly $6 billion budget gap in the coming year, intends to offer loans to small businesses that show potential for expansion.
Tax breaks for businesses have long been controversial because some say business expansion should be spurred by the free market, not by an infusion of taxpayer money. Supporters counter that it’s money well spent and nets millions more from income taxes.
States are collecting less tax revenue because of the highest U.S. unemployment in 25 years, low consumer spending and dismal home sales. Together, they face budget gaps that total $50 billion and could reach $120 billion nationwide in two years, according to an analysis from the Rockefeller Institute of Government, a think tank in Albany, N.Y.
“Given the nature of the crisis now, people are reluctant to cut economic programs if they don’t have to,” said Ian Pulsipher, an economic development analyst with the National Conference of State Legislatures in Denver.
States are looking at various ways to fund the proposed new incentives. Some are cutting budgets in other areas; others are eliminating other tax incentives.
The cost of new tax breaks and loans can’t be calculated yet because it depends on how many companies take advantage of them and what kind of deals are reached.
Iowa paid out $302 million on economic development tax credits in 2007 and $180 million last year. Democrats in the state Senate now want a $175 million limit on four of the state’s major job creation programs.
Minnesota Gov. Tim Pawlenty’s current plan to create jobs is centered around an estimated new state tax credits for small businesses at an estimated $50 million along with a reduction of the state’s business tax rate over the next six years.
The state faces a two-year deficit of $4.6 billion and has lost nearly 86,000 jobs over the last year.
Ohio says its economic development investments have helped create 53,000 jobs and keep 195,000 since 2006.
“Not all tax credits are worthwhile but many are,” said Lt. Gov. Lee Fisher, who oversaw the state’s development department the last two years.
All government programs, he said, benefit from a prosperous economy and more jobs, whether it’s funding for drug treatment programs or public health insurance for children.
Even though states are spending millions on tax incentives every year, the impact isn’t always clear. Studies on whether they help create jobs have produced varying results.
A government audit released last fall of the $1.3 billion that Kansas spent on economic development over five years concluded that “no one can really know what would have happened without government assistance.”
Critics who share that view also question the fairness of incentives that target specific companies or industries.
“Businesses can’t compete with those getting money from government,” said David Hansen, president of the Buckeye Institute, a think tank in Columbus that favors less government.
Better to lower taxes for everyone and leave economic development to the private sector, he said.
Tax credits and other incentives are given when companies build new plants or threaten to move their operations out of state. Some are used to lure jobs from other states; others help companies train workers.
The deals often include guarantees on the number of jobs that will be retained. Companies that break their promises can be forced to return the money.