The growing failure of START-UP, New York State’s signature economic development plan, is just one example of the numerous state economic development programs that have failed to improve economic growth despite costing millions of dollars in taxes and tax incentives, which are used to lure companies to states. In its 2015 report, START-UP found it only created 408 jobs in its first two years, far below the pace needed to match its lofty promise to create more than 4,100 new jobs by the end of 2020.
In an effort to strengthen its economy, New York State has relied heavily on tax incentives, including tax credits, exemptions, and deductions, to encourage businesses to locate, hire, expand, and invest within its borders. Popular examples include economic development initiatives, film-production credits, renewable-energy credits, and electric-vehicle credits.
START-UP is an economic development program designed to encourage new companies to relocate, build, or expand in New York State by allowing companies to operate for 10 years effectively without having to pay taxes in designated parts of the state, called “Tax Free Areas.” The companies participating in START-UP receive reduced tax benefits if they fail to meet job targets. According to the 2015 report, total tax benefits awarded amount to $1.19 million, and thus far, START-UP has drawn 159 new, expanding, or relocating businesses into tax-free areas across the state, most near college campuses.
Despite these supposed gains, New York State’s economy continues to suffer, as it has for decades, due to a less-competitive, highly punitive tax system. The Empire Center reports gains made as a result of the START-UP program have been overshadowed by growing job loss across the state. For instance, the Rochester Metropolitan Statistical Area lost 2,400 private-sector jobs between March 2015 and March 2016.
The Empire Center also warns taxpayers START-UP data are incomplete and the projections provided may be even worse than what is currently known. Empire found only 107 of the 159 businesses reported as part of the START-UP program delivered data to state officials. Additionally, START-UP’s projections assume all companies involved in the program will remain involved with START-UP, which has already been proven false. As result, the START-UP program’s actual five-year job growth could end up being even lower than what has been reported so far.
Proponents say tax incentives encourage businesses to create jobs and invest in the local economy. Scott Drenkard, an economist with the Tax Foundation has questioned the effectiveness of tax incentives. “I’m not sure that giving tax incentives is the way to create growth in a state. It certainly lowers the cost of doing business – but at what cost to taxpayers?”
To determine whether policymakers are getting the information they need to understand whether tax incentives are bringing a strong return on investment, the Pew Center on the States reviewed nearly 600 documents from state agencies and legislative committees and interviewed more than 175 policymakers, agency officials, and experts. Research concluded only four states are successfully tracking how effective their incentives are. Twelve states have mixed results for their tracking efforts, and 35 are trailing behind.
State tax incentives often fail to live up to their promises to encourage economic growth and are usually given for business and industries with the most political clout. Lawmakers should avoid complicating the tax code by creating new tax credits and exemptions and instead focus on attracting business by simplifying and lowering marginal tax rates.
The following documents provide additional information about state tax incentives and economic development programs.
Ten Principles of State Fiscal Policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
Show Us the Subsidized Jobs
According to Show Us the Subsidized Jobs, a report issued by Good Jobs First, a nonprofit research center headquartered in Washington, DC, all but three states now post at least partial information online showing which companies are receiving economic development subsidies. But the quality and depth of that disclosure varies widely, both among and within states. Three-fourths of major state development programs still fail to disclose actual jobs created or workers trained, and only one in 11 discloses wages actually paid. The best disclosure practices are found in Illinois and Michigan, but even their scores would be near-failing as report card grades.
Crony Capitalism and Community Development Subsidies
This Policy Brief by Victor Nava of the Reason Foundation looks at whether community development subsidies actually result in positive community development, and it considers the extent to which such subsidies have been captured by vested interests.
Has START-UP NY Peaked?
Kenneth Girardin of the Empire Center discusses the failure of New York’s START-UP NY, New York’s signature economic development program. Girardin warns START-UP may be in even worse shape than the current data shows.
Evidence Counts: Evaluating State Tax Incentives for Jobs and Growth
Researchers for The Pew Center on the States discuss in this report how states spend billions of dollars annually on tax incentives for economic development. Half of the states surveyed here have not taken basic steps to track whether tax incentives deliver a strong return on taxpayer dollars and provide that information to policymakers.
Avoiding Blank Checks: Creating Fiscally Sound State Tax Incentives
In this report from The Pew Center on the States, Pew researchers offer an analysis of state tax incentives, which shows policymakers often create tax credits, deductions, and exemptions that do not promote job creation or economic growth. The Pew researchers say they instead raise the risk of budget shortfalls, unplanned spending cuts, and/or tax increases.
Audit Says Philly’s Economic Development Program Performs Poorly
M.D. Kittle of Wisconsin Watchdog writes about Philadelphia’s economic development program and how taxpayers are getting little return on their investment.
The Michigan Economic Development Corporation
With the nation’s highest unemployment rate (currently above 15 percent), a distinction it has suffered for 43 consecutive months, Michigan’s economic travails have become well known. Less well known are the lengths the state’s political class has gone to avoid genuine business climate reform, substituting instead expanded “economic development” discriminatory tax breaks and subsidies. A study by the Midland, Michigan-based Mackinac Center for Public Policy suggests these programs have had at best no impact on employment in the state.
Job Turnover Suggests Michigan’s Tax Incentives Are Ineffective
In this article, James M. Hohman of the Mackinac Center for Public Policy discusses Michigan’s tax incentives for businesses and how they have failed to produced economic growth. “Even under the most optimistic assumptions, selecting these companies for special favors accounts for only 1.4 percent of the job gains in the last quarter of 2013. And the $17 million offered to these companies has to come from somewhere, including the struggling companies that shed jobs in the quarter. The magnitude of job turnover suggests the key to improving a state’s economy is enacting broad-based changes to the state’s business climate. Gov. Rick Snyder’s administration has a number of accomplishments in this area, such as eliminating the business tax and enacting right-to-work.”
The Unseen Costs of Tax Cronyism: Favoritism and Foregone Growth
Jonathan Williams, Will Freeland and Ben Wilterdink provide a deep analysis of tax carve-outs and shows they are built on a false premise that they are an effective policy tool for promoting economic growth. The authors show how many of these carve-outs result in harmful economic distortions that, on net, discourage economic growth and encourage “rent seeking” and, many times, political corruption. Examples of individual credits, exemptions, and deductions are examined, and the report outlines what criteria must be met for these to be labeled state favoritism and what are legitimate, sound economic policies.
Ten Principles for Improved Business Climates
Maintaining a good business climate has never been more important. Thanks to the Internet, the collapse of communism around the world, and advances in shipping and logistics, capital and labor are much more mobile than in the past. Businesses must bid for customers and workers, not only from local competitors but also from businesses in other communities, in other states, and even in other countries. Small changes in taxes, regulations, and other cost-drivers may lead to businesses losing customers and possibly failing or relocating.
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Budget & Tax News at http://news.heartland.org/fiscal, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.
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