Ken Plum: Are business incentives worth the investment?

kenplum2Last month Governor Terry McAuliffe announced that Virginia will participate in the Business Incentives Initiative, a joint project of The Pew Charitable Trusts (Pew) and the Center for Regional Economic Competitiveness (CREC) and six other states (Indiana, Louisiana, Maryland, Michigan, Oklahoma and Tennessee) to “reform economic development incentive reporting policies and practices.”

While millions of dollars are spent on tax incentives and grants to lure business to Virginia each year, there is no evidence that the programs are actually working as intended. There is a national debate across the country about the necessity and value of tax incentives to encourage economic development.

In a report issued earlier this year the Pew Research Center issued a fact sheet, “Evaluating State Tax Incentives: How to Measure Economic Impact” (Pew Research Center Fact Sheet), about high-quality evaluations of tax incentive programs in Minnesota, Louisiana, and Massachusetts in what they termed “models for other states to follow when measuring the results of their own incentives.”

In Minnesota, evaluators estimated that 79 percent of the jobs created at companies receiving incentives were likely to have been generated without them. Jobs created cost the state more than $26,000, or about five times more than originally estimated according to the analysts.

Louisiana’s evaluation of its Enterprise Zone program found that in certain economic sectors 90 percent of new jobs created in the program were displacing jobs with other employers. Evaluators concluded that the program had created about 3,000 jobs instead of the more than 9,000 jobs that participating businesses had reported.

An analysis of the Massachusetts film industry tax credit reported by the Pew Center found that the more than 5,900 jobs created from 2006 through 2011 cost the state $326 million dollars that had to be offset by cuts elsewhere in the budget. The evaluation estimated that these cuts cost the state more than 3,700 jobs, leaving Massachusetts with a net gain of 2,200 jobs for its investment making each job gain much more costly than had earlier been estimated.

At the direction of the General Assembly, Virginia’s Joint Legislative and Audit Review Commission (JLARC) undertook a review of the effectiveness of economic development incentive grants available in Virginia and issued a report in November 2012 titled “Review of State Economic Development Incentive Grants.” During the time-frame of the study, fiscal years 2002 to 2011, there were 3,372 incentives offered. JLARC researchers looked at more than 80 econometric studies published since 1979 that concluded that incentive grants may sway, on average, ten percent of the site location decisions of businesses that receive an award. While these results are still debatable, JLARC staff concluded that there is no empirical evidence to suggest that “most or even the majority of business location decisions are swayed by incentive grants.”

The work of the Business Incentives Initiative is long over-due. Its recommendations will help the Commonwealth make better decisions in investing taxpayer dollars, and it will help evaluate the outcomes of investments that are made.

Ken Plum is a member of the Virginia House of Delegates.


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