National Report: Business Tax Subsidies ‘Costly for States, Drag on the Nation’

In August, as NJPP was busy analyzing the latest details of New Jersey’s long-debated overhaul of its business tax subsidy programs, the national Institute on Taxation and Economic Policy (ITEP) presented a report to the National Conference of State Legislatures that explored the “enormous costs” and “many pitfalls” of this tool that is increasingly touted by New Jersey officials as the foremost method of creating jobs and growing the economy. The report adds to the growing body of research that finds that the widespread use of subsidies has little positive impact on the economy, and may actually be harming it instead.

Two key points to highlight from the short report:

On ‘Windfall Benefits’: As NJPP has frequently noted, subsidies are rarely the deciding factor in whether a business chooses to move to or hire within a state – they may provide a nice icing on the cake, but they aren’t the driving force.

Since state and local taxes are only about 1.8 percent of the cost of doing business, as ITEP notes, even the largest subsidies are “of limited impact to a firm’s balance sheet.”

The report continues: “Based on the ‘consensus’ estimates in the academic literature about the responsiveness of business decisions to taxes, as many as 9 out of 10 hiring and investment decisions subsidized with tax incentives would have occurred even if the incentive did not exist. These large and mostly unavoidable windfall benefits significantly reduce the cost-effectiveness of virtually every tax incentive.” (emphasis added)

On ‘Neglected Alternatives’: The billions in tax subsidies New Jersey has awarded in recent years have to be paid for, and, as ITEP notes, “oftentimes that means reductions in the public services that businesses use every day.”

By dialing up the reliance on tax subsidies and draining the state of much-needed tax revenue for many years to come, New Jersey has less money available to spend on public education, reliable transportation networks, workforce development, innovative projects at public universities and other public goods.

“While the long-term economic benefits of education and infrastructure investments may not be as flashy as incentive-backed ribbon-cutting ceremonies, these investments are even more fundamental to any successful economy,” ITEP finds.

So what can be done?

Assuming that state and local governments aren’t going to abandon their subsidy programs any time soon given the political headwinds, the ITEP report offers several policy solutions to reduce the harm subsidies can cause. Some of the solutions have been incorporated in New Jersey, but here are a few promising ones that have not:

Mutual Disarmament: “States should seek out opportunities to partner with their neighbors in amicably ending the worst aspects of the tax incentive arms race,” ITEP suggests.

It notes that “business leaders in the bi-state Kansas City community recently called on their elected officials to do just this, urging that Missouri and Kansas lawmakers work together to end the practice of luring businesses back-and-forth across the state line with expensive incentive packages.”

New Jersey’s geography and its employment flows make it an ideal state to use this type of approach with New York and Pennsylvania. This is certainly not an easy proposition, but if New Jersey’s business leaders followed the example of their Midwestern counterparts, political leaders would start to notice.

Financial Discipline: A spending cap is a common-sense solution that is, thanks to the recent overhaul, now missing from New Jersey’s jobs-related subsidy program (Grow New Jersey). Returning a spending cap to Grow New Jersey would be a great victory for accountability, increasing the legislature’s key role in oversight.

Caps prevent subsidy programs from growing beyond a predetermined size without attracting the attention of lawmakers – a real threat in a state like New Jersey, where the legislature writes the law governing the subsidy programs but then hands it off to an autonomous agency to award and manage the grants.

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