economic development incentives: a necessary evil?

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Economic Development Economic Development Incentives: A Incentives: A Necessary Evil? Necessary Evil? Russell S. Sobel, Ph.D. Russell S. Sobel, Ph.D.

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Economic Development Incentives: A Necessary Evil?. Russell S. Sobel, Ph.D. Are Selective Incentives the Answer?. Are Selective Incentives a “Necessary Evil” Given Bad Business Climate Rankings (e.g., bad policies)? What is the Evidence on Their Effectiveness from the Economics Literature? - PowerPoint PPT Presentation

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Page 1: Economic Development Incentives: A Necessary Evil?

Economic Development Economic Development Incentives: A Necessary Evil?Incentives: A Necessary Evil?

Russell S. Sobel, Ph.D.Russell S. Sobel, Ph.D.

Page 2: Economic Development Incentives: A Necessary Evil?

Are Selective Incentives the Answer?Are Selective Incentives the Answer?

Are Selective Incentives a “Necessary Evil” Are Selective Incentives a “Necessary Evil” Given Bad Business Climate Rankings Given Bad Business Climate Rankings (e.g., bad policies)?(e.g., bad policies)?

What is the Evidence on Their What is the Evidence on Their Effectiveness from the Economics Effectiveness from the Economics Literature?Literature?

What are the True Costs / Side Effects?What are the True Costs / Side Effects?

Page 3: Economic Development Incentives: A Necessary Evil?

Spending on IncentivesSpending on Incentives

Total all U.S. states, cities, & counties spend over $80 billion per year.

There are 21 states spending more than one billion and another 10 that give between $500 million and a billion. 

Top 10:Texas $19.1 billionMichigan $ 6.6 billionPennsylvania $ 4.8 billionCalifornia $ 4.2 billionNew York $ 4.1 billionFlorida $ 4.0 billionOhio $ 3.2 billionWashington $ 2.4 billionMassachusetts $ 2.3 billionOklahoma $ 2.2 billion

Source: December 2012, the New York Times 

Page 4: Economic Development Incentives: A Necessary Evil?

Spending on IncentivesSpending on Incentives

Page 5: Economic Development Incentives: A Necessary Evil?

South Carolina spends at least $896 million per year on incentive programs, or roughly $194 per capita, or 15¢ per dollar of state budget

Top Incentives by type:•$435 million in Sales tax refund, exemptions or other discounts•$230 million in Cash grant, loan or loan guarantee programs•$104 million in Corporate income tax credit, rebate or reduction

Top Incentives by industry•$218 million in Defense•$130 million in Manufacturing•$102 million in Agriculture

Source: http://www.nytimes.com/interactive/2012/12/01/us/government-incentives.html#SCSource: http://www.nytimes.com/interactive/2012/12/01/us/government-incentives.html#SC

Spending on IncentivesSpending on Incentives

Page 6: Economic Development Incentives: A Necessary Evil?
Page 7: Economic Development Incentives: A Necessary Evil?
Page 8: Economic Development Incentives: A Necessary Evil?

•Frederic Bastiat - “The Seen and The Unseen”/“Broken Window Frederic Bastiat - “The Seen and The Unseen”/“Broken Window Fallacy”Fallacy”

• We must consider the unseen costs of what is given up when We must consider the unseen costs of what is given up when resources are used for incentives (What else the money would resources are used for incentives (What else the money would have created if left in the private sector, for example)have created if left in the private sector, for example)

• We must also focus on NET job creation (subtract ones who We must also focus on NET job creation (subtract ones who change jobs to be employed by incentivized firm)change jobs to be employed by incentivized firm)

Economic Theory to UnderstandEconomic Theory to Understand

Page 9: Economic Development Incentives: A Necessary Evil?

U.S. Auto Plant

Investments*

Company StateAnnouncement

Date

Initial Employment

Estimate

Announced State and Local Incentives

(Millions)

Real Incentives‡ (2001 Million)

Real Incentive‡

Cost per Job

Hyundai Alabama 2002 2,000 $118 $118† $59,000†

Toyota Alabama 2001 350 $29 $29 $82,857

Nissan Mississippi 2000 4,000 $295 $299 $74,835

Honda Alabama 1999 1,500 $158 $165 $110,290

GM Michigan 1998 700 $107 $114 $162,287

Mercedes Alabama 1994 1,500 $253 $289 $192,730

BMW South Carolina 1992 1,900 $130 $155 $81,479

Toyota Kentucky 1986 3,000 $147 $214 $71,404 *Inflation adjustments are made using GDP deflator series.

‡Includes only primary real incentive, not additional ongoing incentives.

†2002 dollars assumed equal to 2001 dollars.

Source: Division of Research; University of South Carolina, 2002. Economic Impact of BMW

Page 10: Economic Development Incentives: A Necessary Evil?

Study Region/Time Findings

Ambrosius (1989) National study of development incentives, 1969–1985

No evidence of incentive impact on manufacturing value-added or unemployment, thus suggesting that tax incentives were ineffective.

Trogan (1999) National study of state economic growth and development programs, 1979–1995

General fiscal policy found to be mildly effective, while targeted incentives reduced economic performance (as measured by per capita income).

Gabe and Kraybill (2002)

366 Ohio firms, 1993–1995 Small reduction in employment by businesses which received Ohio’s tax incentives.

Fox and Murray (2004)

Panel study of impacts of entry by 109 large firms in the 1980s

No evidence of large firm impacts on local economy.

Edmiston (2004) Panel study of large firm entrance in Georgia, 1984–1998

Employment impact of large firms is less than gross job creation (by about 70%), and thus tax incentives are unlikely to be efficacious.

Hicks (2004) Panel study of gaming casinos in 15 counties (matched to 15 non-gambling counties)

No employment or income impacts associated with the opening of a large gambling facility. There is significant employment adjustment across industries.

LaFaive and Hicks (2005)

Panel study of Michigan’s MEGA tax incentives, 1995–2004

Tax incentives had no impact on targeted industries (wholesale and manufacturing), but did lead to a transient increase in construction employment at the cost of roughly $125,000 per job.

Hicks (2007a) Panel study of California’s EDA grants to Wal-Mart in the 1990s

The receipt of a grant did increase the likelihood that Wal-Mart would locate within a county (about $1.2 million generated a 1% increase in the probability a county would receive a new Wal-Mart), but this had no effect on retail employment overall.

Hicks (2007b) Panel study of entry by large retailer (Cabela’s)

No permanent employment increase across a quasi-experimental panel of all Cabela’s stores from 1998 to 2003.

Economic Findings on Development IncentivesEconomic Findings on Development Incentives

Page 11: Economic Development Incentives: A Necessary Evil?

Air SouthAir South 1994 Partially financed by the South Carolina State 1994 Partially financed by the South Carolina State

GovernmentGovernment Ceased operations in 1997 losing $12 million in state and Ceased operations in 1997 losing $12 million in state and

$1.5 million in City of Columbia financing$1.5 million in City of Columbia financing

Southwest AirlinesSouthwest Airlines April 2010 state legislature was drafting legislation for $15 April 2010 state legislature was drafting legislation for $15

millionmillion May 2010 Charleston County Council was ready to May 2010 Charleston County Council was ready to

approve a 5% rental car taxapprove a 5% rental car tax Charleston Regional Business Journal reported the Charleston Regional Business Journal reported the

legislation would not pass in 2010legislation would not pass in 2010 ““State Senator Larry Martin of Pickens said the incentives State Senator Larry Martin of Pickens said the incentives

bill is crucial to attract a low-fare airline anywhere in South bill is crucial to attract a low-fare airline anywhere in South Carolina.”Carolina.”

May 2010 USA Today reported “Southwest Airlines plans May 2010 USA Today reported “Southwest Airlines plans to begin flights to South Carolina next year and isn't waiting to begin flights to South Carolina next year and isn't waiting to learn if the legislature there will provide subsidies.”to learn if the legislature there will provide subsidies.”

A Tale of Two AirlinesA Tale of Two Airlines

Page 12: Economic Development Incentives: A Necessary Evil?

Problems with Selective IncentivesProblems with Selective Incentives Evidence is they aren’t very effective and Evidence is they aren’t very effective and

have high costs per job createdhave high costs per job created

They create an environment of favor seeking They create an environment of favor seeking and “Unproductive Entrepreneurship” and “Unproductive Entrepreneurship” [William Baumol][William Baumol]• Girl Scout Cookie ExampleGirl Scout Cookie Example

Doesn’t help small businesses and may make Doesn’t help small businesses and may make it worse for them it worse for them • Taxes on them are higher and they have to Taxes on them are higher and they have to

compete with the favored firmscompete with the favored firms

Page 13: Economic Development Incentives: A Necessary Evil?

Thank you / Q&AThank you / Q&A