Job Poaching Between States.Tax Incentives Gone Wild!

There has been much talk on Beacon Hill about the existence of tax expenditures in the state budget, and the desire to get rid of some of the less productive ones. I have done one earlier post on tax expenditures, and they are considered to be so important that they now produce a “tax expenditure” budget at the State Level, which details these items in excruciating detail. One of the areas we are all familiar with is the utilization of tax incentives to attract business to a locality or a state, with that being one of the items that I consider to be a true “tax expenditure.” During my Administration as Mayor of Methuen we used tax incentives on a couple of occasions, after public vetting and discussion. There is a new report out, from the Washington based “Good Jobs First” organization that is highly critical of tax incentives given to lure existing business and jobs from state to state. I believe they make some pretty powerful arguments, and they provide detailed examples of what they consider to be wasteful expenditures by some states that use incentives to relocate business and jobs without creating any additional economic activity.

The report,titled “The Job Creation Shell Game“, attached below in pdf format, was covered in a story at Governing magazine. The Executive Director of Good Jobs First commented for the Governing story.

Greg LeRoy, the group’s executive director, said many incentive-laden deals aimed at out-of-state employers lead to little, if any, net job growth. “It’s not a winner for the state, it’s economically irresponsible and it shortchanges the companies that really matter,” he said.

The report itself indicts the process that has allowed corporations to shift locales to garner huge tax breaks without providing true economic benefit. From the report:

What states euphemistically call “business recruitment” is often nothing more than the pirating of jobs by one state from another. This piracy is bankrolled by property, sales and income tax breaks, land and infrastructure subsidies, low interest loans, “deal-closing” grants, and other subsidies to footloose companies.
For trophies such as corporate headquarters, some states even offer per-job cash grants to finance executive relocations.The dark flip side of subsidized job piracy is “job blackmail,” politely called “retention incentives.” With subsidies readily available to any company that creates the appearance of moving, states are more eager to pay companies to stay.

I believe the the study hits some important points, and makes several recommendations that are both pragmatic and achievable.

To cool these job wars, the report recommends that states demonetize interstate job fraud. That is, the states should stop subsidizing companies for existing jobs that are treated as “new” simply because their location has changed. The study reveals that the vast majority of states already know how to do this: four-fifths of the states already refuse to pay for intrastate job relocations. For at least one and sometimes most of their major incentive programs, 40 states disallow subsidies for existing jobs that are merely being moved within their own borders.The report also recommends that states end their business recruitment activities that are explicitly designed to pirate existing jobs from other states. It also suggests a modest role for the federal government: reserving a small portion of its economic development aid for those states that amend their incentive codes to make existing jobs ineligible for subsidies and certify that they no longer engage in raiding.

In terms of local and state incentives Massachusetts requires “new job growth” (for the state portion) in order to give a subsidy, and in my experience that definition is tight, and strictly adhered to. The locals have an ability to do some Tax Increment Financing, which would give some property tax relief on the “incremental” (increased) value of property owned by a “new” business entity after a development. Massachusetts policy on “job retention financing” for in state companies, or “job incentive financing” that may be offered to out of state companies, appears to be on sturdy ground as evidenced by the Curt Schilling case, which was cited in the study. But we have had our share of controversy in this area as well, including criticism of deals for Raytheon and Fidelity where job losses occurred in spite of lucrative tax deals bestowed. Senator Mark Montigny has been a strong advocate for evaluating these tax deals on a continuing basis, and revoking them where they are no longer effective, or the company is failing to fulfill their obligations.

Job poaching by giving away scarce tax dollars may make a politician look good in the short term, but the specific examples cited in the study absolutely warrant scrutiny. Corporations are indeed gaming inter (and intra) state relocations to extract tax dollars from states and localities, with negative impacts being felt nationwide.

The net effect of these piracy lures and blackmail payoffs is to divert economic development resources away from helping companies expand or start up, where virtually all the job-growth action is. And when many states are still making painful budget cuts, putting lots of eggs in a few corporate baskets reduces funding available for the low-risk, high-payoff investments in education and infrastructure that benefit all employers.

It is a great report, and while I realize that business incentives can be a powerful tool, I believe that the cross-border raids are not serving the needs of taxpayers or other businesses. The Good Jobs First folks have produced a report that should have both federal and state legislators asking some hard questions about the true value of many of these “business tax incentives”.

State Tax Incentives

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