Tax bait for trophy companies.

• Author: Brainerd, Jackson

Big corporations have been lured by tax incentives to expand in or locate to a state. Are they worth it?

Nevada scored a big win last fall when, after a five-state bidding war, Tesla Motors picked it as the site for its new $5 billion battery manufacturing "giga-factory."

The Legislature unanimously approved a $ 1.3 billion tax incentive package to lure the 12-year-old Silicon Valley, electric carmaker in exchange for the promise of creating 20,000 new jobs and generating $100 billion in state economic activity, according to the Governor's Office of Economic Development. Some people called the deal the biggest thing since the Hoover Dam.

Time will tell if Nevada's gamble pays off.

Improving the business climate and spurring economic growth are top priorities for most state legislators. And although many economic development strategies--such as income tax cuts and workforce training--can get mired in partisan rhetoric, megadeals offering substantial tax incentives to single, lucrative corporations, enjoy unusual bipartisan support. And the bait is increasing.

Of the 20 largest incentive deals ever, all valued at $800 million or more, 19 occurred since 2000 and 11 since 2010.

Economists' Gloom

Today, every state offers at least some sort of tax incentive for businesses. Yet, despite lawmakers' enthusiasm for corporation-specific incentives, many economists, experts and other observers, from the left to the right, doubt they are an efficient use of public money.

Nevada's partnership with Tesla came under fire from the conservative Nevada Policy Research Institute and the liberal Progressive Leadership Alliance of Nevada. Both questioned whether the new legislation would ever benefit Nevada's taxpayers.

In its recent report on 2015 State Business Climates, the more conservative Tax Foundation cautioned: "Economic development and job creation tax credits complicate the tax system, narrow the tax base, drive up tax rates for companies that do not qualify, distort the free market, and often fail to achieve economic growth."

The more liberal Center on Budget Policy and Priorities concurred, and called economic development tax subsidies "relatively ineffectual, potentially counterproductive, and not cost-effective incentives for job creation and investment."

Those who oppose these large tax incentives generally consider them to be a zero-sum game for the nation, as there is no net economic gain when one state forgoes revenue to coax a business away from another state. In fact, a report published by the Journal of American Planning Association estimated that incentive programs cost state and local governments about $40 Jackson Brainerd is a research analyst in NCSL's Fiscal Affairs program. billion to $50 billion a year.

So what gives? Why is there this disconnect between fiscal theory and practice when it comes to this kind of incentive?

Absence of Evidence

For proponents of these corporation-specific incentives, the debate over whether incentives are theoretically sound fiscal policy is beside the point. They believe they are absolutely necessary. If a state does not offer incentives, out-of-state businesses looking to relocate will find one that does; or worse, the major employers that are already in-state will leave for greener pastures. It's a classic "race to the bottom," critics say, and states don't have much of a choice in the matter.

A report prepared for the South Carolina Chamber of Commerce on the tax incentives received by Boeing, states it this way: "While some nonpractitioners argue on theoretical bases that it would be...