Business Insider

Peter R. Crabb: Government incentives for business are useless

There is nothing like a close game. Excitement builds when the clock ticks down or the game moves to extra innings.

Like sports fans, economists like competition. Competitive markets are most efficient; resources are used productively and the benefits get passed on to consumers.

Some players, however, should think twice before they compete. State and local governments reduce market efficiency and lower consumer benefits when they compete for business investment and relocation.

With elevated unemployment rates and strained budgets, many state and local governments are competing more to lure new business to their area. However, the tax incentives are likely to do little for long-run employment and tax revenue.

On April 13, Gov. Butch Otter signed a new law providing tax credits for companies that hire at least one new employee this year. However, according to the attorneys at Stoel Rives in Boise, the new law is “very complex” and employers will have a hard time determining eligibility. Even if eligibility is determined, wages for these new hires will offset state income tax receipts unless sales expand much faster.

Idaho already has myriad incentive programs in place for business investments. The Idaho Department of Commerce says businesses investing $500,000 in new facilities and hiring at least 10 new workers with average salaries above $40,000 annually before benefits can qualify for a higher investment tax credit, a job tax credit, a real property tax break and, potentially, lower county property taxes.

Unfortunately, special tax incentives do little to promote job growth.

The Detroit Free Press looked at 195 incentive awards by the state of Michigan from 1999 through 2005. The study found that more than half of the awards were never used because not enough jobs were created. The auto industry received 45 percent of these awards despite steep drops in employment during the period.

Recently, some policymakers have been asking for the money back while still making new offers to some businesses.

Ohio Gov. John Kasich has reportedly signed nearly a dozen “clawback” orders, demanding businesses repay government tax incentives and development grants. These companies are apparently guilty of not meeting hiring goals while the economy has been in the worst recession of the past three decades.

At the same time, Kasich offered new incentives to hold on to another business. ATM manufacturer Diebold Inc. announced it would not move its Ohio headquarters after receiving a $56 million package of tax credits, loans and grants from the state.

The only group these incentive packages seem to help is the lobbyist industry. According to the Center for Public Integrity, lobbying expenditures in Idaho alone nearly doubled between 2004 and 2006.

Money and effort to secure government benefits is better used developing new products or improving business practices. At the same time, government officials have better uses of their time rather than trying to determine which companies are most likely to help their local markets.

Competition is exciting, but the sport of state and local government incentives is a boring and pointless game.


PETER R. CRABB Professor of finance and economics at Northwest Nazarene University in Nampa