Tax Incentive Reform.

• Author: Bartik, Timothy J.

State and local governments have long provided tax incentives to attract business and jobs. Some stand behind the practice, maintaining that it's a proven way to put residents of their communities to work. Others disagree, saying research shows that money spent on incentives doesn't have the impact expected. Timothy J. Bartik, a senior economist at the Upjohn Institute for Employment Research, argues that incentives need to be significantly reformed. GFR Managing Editor Marcy Boggs doesn't disagree, but points out the practicalities governments face, especially those that aren't part of major urban areas.

POINT

Incentives Should Be Cut Back and Reformed

By Timothy J. Bartik

Economic development tax breaks to business--commonly called incentives--need significant reforms.

Incentives are excessively costly per job created, and too few jobs go to local residents who need them, those who are unemployed or underemployed.

Reforms should cut back the cost per job and target more jobs at those who need them.

Many incentives are wasteful because they do not tip the location decision. At least 75 percent of the time, incentives have no effect on local job creation

Of the jobs that are created, on average only 30 percent or fewer go to local residents who are not employed.

Despite these problems, governors and mayors gain political support from well-publicized large incentives to mega-corporations. Offering long-term incentives allows a governor or mayor to pass on costs to their successor.

Defenders of incentives sometimes claim that incentives pay for themselves. This is untrue. Once one accounts for incentives that don't tip location decisions, and for public service costs due to in-migrants, only 20 percent of the budget costs of incentives are offset by fiscal benefits.

Here are reforms that can help:

* Cut back the maximum incentive to no more than $30,000 per job. Some incentive offers have exceeded $200,000 per job.

* Restrict long-term incentives--those that last beyond five years. Passing on costs to political successors tempts governors and mayors to excess.

* Have rules that prevent large firms from getting higher incentives per job because they attract media attention. For a given industry, the incentive per job should be similar for different size firms.

* Incentives should be larger in distressed areas, where more jobs will go to the local unemployed. Incentives should be smaller in less distressed areas.

* In non-distressed areas, tie...