Category Archives: Research

Redundant, Redundant, Redundant: Economic Development Incentives

 

I have taken a break from blogging in my move from George Washington University to the University of Texas. I’m back!  Hello?  Anyone there?

My previous research (with many co-authors including Eddy Malesky) has looked at the use of economic development incentives to attract jobs.  In two published papers we argue that politicians use incentives to take credit for economic development and this leads to the overuse of incentives.

My big criticism of incentives are they are often redundant.  Incentives are tax breaks or grants to induce firms to relocate, expand or stay put.  But academic research shows that the majority of firms would have made the same decision (relocate, expand, or stay) even without incentives.  In these cases, incentives are just a transfer of tax payer funded benefits to firms for no new economic activity.

Two stories this week reiterate this redundancy.

First, ConAgra chose to relocate from Nebraska to Chicago despite Chicago offering less than half of the economic development incentives.  A company taking a smaller incentive offer isn’t a smoking gun that incentives weren’t effective.  More telling are the CEOs statements saying that these were not pivotal in the investment location decision.

“The decision to move headquarters was solely based on the strategic needs of our business and was not a city-vs-city exercise.”

According to newspaper reports, this didn’t stop the company from claiming to government officials that incentives were necessary and used creative accounting to get around an Illinois policy freezing new economic development incentives.  According to the Omaha World Harold:

But documents newly obtained by The World-Herald also show that ConAgra officials told the Illinois state government a different story in the months prior to its announcement.

ConAgra told Illinois officials that tax incentives were needed to justify moving its offices to Chicago. Illinois officials must have been convinced. They found a way around a statewide moratorium on incentives the governor had recently imposed because of a budget crisis in Illinois.

In short, prior to moving the company did everything possible to maximize their incentive tax.  After the deal was struck the company claimed that these incentives weren’t necessary.

Second, Marriott international moved its headquarters to Bethesda, MD with $62 million in economic development incentives.  This is a big deal and the new economic activity for a corporate location could have a major economic development impact.  Where did they move from?  From four miles down the road in Maryland.

A short move like this isn’t a smoking gun that incentives weren’t important.  It is plausible that the company could have moved to DC or Virginia with the right deal.  What is more revealing is this paragraph from the Washington Post:

Officials in D.C. and Virginia discussed a pursuit of Marriott, but it’s unclear how aggressively they pushed. Leaders in both jurisdictions remained wary about chasing a company they viewed as likely to remain in Maryland, according to officials familiar with the process were not authorized to discuss it.

It certain sounds like incentives were redundant in both cases.

I have a short podcast at the Scholars Strategy Network on the topic if you are interested.

Our Pre-registered Field Experiment on Investment Incentives

Our latest project on economic development incentives is up for comments.

http://equitablegrowth.org/electoral-institutions-and-electoral-cycles-in-foreign-direct-investment/

This project is a field experiment with Mike Findley and Dan Nielson on how election timing shapes the use of local economic development dollars.  Our pre-analysis plan was registered at EGAP.

The Washington Center for Equitable Growth is circulating this as part of their working paper series. (They did not fund the research).

Comments welcome!

 

What’s the matter with New Jersey?: Overpaying and not paying for economic development

I’ve started yet another project on the costs of offering subsidies to individual firms. These economic development incentives are especially common in the United States where states and cities often compete with each other over firms.

One part of the project is compiling incentives data contained in a database called Incentive Monitor, which is one of the most comprehensive databases of incentives. There are other incentive databases, including Good Jobs First Subsidy Tracker.

Using the Incentive Monitor database we can get a snapshot of the use of incentives in the United States. In the year 2014 alone I can identify over 2,000 individual economic development incentives at an aggregate cost of $10 billion, although this largely ignores many of the local economic development incentives such as tax incremental financing. The incentives in this data base are credited with creating a total of just under 309,000 jobs, or just over $32,000 per job.

These aggregate numbers can be misleading, where the over 2,000 economic development programs are each associated with fiscal costs and job creation numbers. In some cases these incentives are associated with projects that create zero jobs, either these are associated with other goals, such as promoting renewable energy, or in “safeguarding” jobs from being poached by other cities, states, or countries.

By removing the incentives that have no state job creation numbers, the average amount of incentives per project remains at over $31,500. Whether you think this is a big or small number is up to you. What I found interesting is the dramatic differences in the cost of incentives per job by state.

Some states provide either provide no incentives or the number of observations are so small we don’t want to draw inferences. But for the states that offered at least ten incentives in 2014, there is a clear pattern.

First, a number of states provide incentives, but at a substantially lower cost per job than the national average. A large cluster of states offer incentives at cost per job in the teens. What do states like Florida ($10,000 per job), Indiana ($12,000), Maryland ($18.521) and Mississippi ($19,136) have in common?

The Pew Charitable Trusts has been active in helping states reform their economic development programs. They have identified states that have reformed their programs from 2012 to 2014, and five of these states are in our data set. Which states reformed their incentive programs? Florida, Indiana, Maryland, and Mississippi along with Louisiana. We’ll get to Louisiana in soon.

These states that have enacted reforms aren’t the only states with less costly incentive programs, and this description doesn’t make a causal claim that these reforms have reduced the costs of these programs. But there is clearly a cluster of reformer states that have much less costly incentive programs.

Second there are a number of states such as Connecticut that were consistently above the average. Investors in Connecticut were offer 87 incentives at an average cost per job of $59,000. This average is driven up by two massive incentives to United Technologies and Praxair. But of the 87 incentives, 52 were above the national average in terms of costs per job.

Louisiana, one of the states that enacted reforms of their incentive programs, was very active in offering incentives (125 incentives in 2014) and at a cost of $58,083 per job. Iowa performed better but was still above the national average (58 incentives at a cost of $42,000 per job). Illinois provided 31 incentives at a cost of $63,000 per job.

Making relative comparison of these programs is difficult given the different goals of the programs and the additional incentive programs in states that may not be captured in this data. For example, the many tax increment financing districts in Illinois are not included in this data, which could potentially increase or decrease the cost per job averages.

The point is that there are three clusters. Low cost per job, high cost per job and New Jersey.

New Jersey offered 86 incentives at an average cost of over $238,500 per job. That can’t be correct. Let me double check.

It is correct. New Jersey has clearly offered some massive incentives that created very few jobs. For example, the highly criticized $82 million incentive to attract the Philadelphia 76ers practice facility is credited with 250 jobs ($328,000 per job). This helps us get to the $238,500 per job estimate.

But offering incentives at a whopping per job cost isn’t an outlier in New Jersey. It seems to be their economic development strategy.

If we rank all 2,000 plus incentives on a cost per job basis, six of the most expensive (per job) incentives are in New Jersey. This includes the high profile Subaru incentive to attract the company to Camden, New Jersey. Of the top 50 most expensive incentives per job deals, here is the state distribution.

1-New Jersey

Nineteen of the fifty most expensive incentives were New Jersey incentives.

What is happening in New Jersey?

Interestingly, economic development incentives are under fire in New Jersey, but probably not for the reason that you have expected. The state has under funded their economic development budget and the state owns companies their incentive checks. $785 million in checks.

The main reason is that these incentives, unlike many of the tax credits in other states, require a budget allocation. For example, in most other states an economic development agency can be authorized by the legislature to allocate tax credits, lowering the firm’s future tax bill.

In New Jersey, firms pay their taxes, but are issued a rebate from the state coffers. What is the difference? The difference is that the state needs to have the money in an economic development fund to provide the rebate to firms. But with the budget crisis in New Jersey these programs have been underfunded and thus the rebate checks haven’t been sent out.

I wish I had some clever conclusions on what is happening in New Jersey. Something very, very different is going on in New Jersey. And that isn’t a compliment.

FOIA isn’t free

As part of a research project I submitted a number of freedom of information act (FOIA) requests. Most of my requests are at the state level, so different state sunshine laws shape what is required by agencies.

In the past I had a very mixed experience with these requests. Requests to state economic development agencies ranged from detailed data within a month to over a year wait to receive a simple spreadsheet.

My strategy was to send these agencies a polite request for data and a description of my research project. It is hard to draw inferences on this limited FOIA experience, so I hunted around on work on FOIA requests and learned about bit about FOIA requests.

Learning from the FOIA Requests of Others

Quite a few NGOs provide detailed advice on FOIA requests. Many of these agencies coach requesters to make very formal requests that provides details on state FOIA laws, know what exact data you want, and reference the legally required respond time. Walk in like you own the place is the saying that I have heard many times.

A number of other transparency groups provide similar recommendations and some of keep tabs on backlogs in FOIA requests. Public Citizen has a nice guide and a sample FOIA letter.  Here are resources for investigative reporters.

A nice template for those interested in state economic development is from Good Jobs First.

One issue with FOIA requests isn’t only the wait time, but the potential costs. See the above guides where journalists can have fees waved. But for academics there seems to be more discretion from agencies. My own FOIA requests have ranged from free to a quote of $1,000.

Learning from the FOIA Responses of Agencies

FOIA requests are generally made to an agency and whatever information they provide as part of the request goes directly to the requestor. But in other cases, agencies such as the EPA make FOIA data public. So if you request data the agency will send you the data and publicly post the request and data.

One organization, MuckRock directly posts FOIA requests, correspondence with the agency, and the final data on their website. Thus even for agencies that don’t make this request public, MuckRock posts it for everyone to see.

This can be extremely useful for academic research. For example, I examined FOIA requests on issues related to both trade and economic development subsidies.   This search not only uncovered some interesting FOIA request, there was also a FOIA request for all USTR FOIA requests.

What I found interesting in these USTR FOIA requests is that you observe lots of FOIA requests by political parties. A large number of USTR FOIA requests were from the Democratic Senatorial Campaign Committee. Then a FOIA request from the National Republican Senatorial Committee to get the FOIA requests and data of the Democratic Senate Committee. The Republicans want to know what the Democrats found.

I also accidentally stumbled onto a request for all rejected vanity license plates in Maryland. They didn’t have the list of rejected plates, but they do have a guide that lists “objectionable plates” that plates that would be automatically rejected. Don’t open this in front of your teenage kids or if you plan on having a productive afternoon. There are thousands of these plates.

There’s many “failed requests”. Many agencies don’t respond, require the requester to be a resident of the state, charge large amounts of money, or claim that they are exempt from the request.

The Opposition to FOIA Requests

When looking at these FOIA requests I notice that MuckRock allows organizations (including investigative journalists) to have their data embargoed to allow time for them to write up their “scoop”.

I honestly hadn’t thought about this, but it seemed obvious to me that even journalists have mixed views about FOIA requests. Having access to data that nobody else has provides a competitive advantage over other journalists.

It turns out that new Federal Government FOIA policy have caused a stir. Many agencies are now required to make their FOIA requests and data public.

This has lead to a backlash from at least some journalists.  The worry is that journalists using FOIA requests for a story will be making their request public for others (including other journalists) to see.

As a professor in a business school these concerns about competitive advantages make perfect sense. Investigative journals want a scoop, and collecting information is only a small part of the process. Journalists could feel pressure to quickly write up stories or simply stop investing time and money into FOIA requests.

But there is at least some irony that intrepid investigative journalists pushing for transparency of government wanting to be the gatekeepers of this transparency.

UPDATE

I just received data from a FOIA request for Virginia economic development data.  The FOIA representative from YesVirginia contacted me a couple days after my submission clarifying my request.  And then delivered almost everything I wanted just a few days later.  Kudos to the staff at Yes Virginia.

Job creation incentives didn’t incentivize job creation

I have a blogged about a some of my recent research projects examining the use of financial incentives to attract firms. My co-authors and I have written that politicians use these incentives to claim credit for investment, but these incentives have very little impact on job creation.

With the support for the Ewing Marion Kauffman Foundation, I have been examining incentive policies in the Kanas City region. As part of this project I surveyed all of the recipients of the Promoting Employment Across Kansas (PEAK) program, the flagship Kansas economic development program.  I have used observational data to compare incentive recipients to non-incentive recipients.

I also conducted a survey of recipients on how incentives affected their employment plans. Using data from a Freedom of Information request I identified 105 PEAK incentive applicants. For all 105 firms, the managers received a recruitment email and a link to an online Qualtrics survey asking a battery of questions about their company’s involvement with the PEAK program. I received a total of 25 responses for a response rate of 23%.

What are the findings?  Incentives are popular with companies and they are ineffective in creating employment.

You’re still reading?

When asked about the program, the vast majority of respondents had a positive experience with the PEAK program and would recommend this program to other firms. A striking 71% of respondents indicated that the program was either “very efficient” or “somewhat efficient” and 92% of respondents would “definitely recommend” or “probably recommend” this program to other firms.

What was the purpose of these incentives? The majority of firms (58%) indicated they were applying for PEAK incentives for expansion, while 42% and 25% indicated this was for relocation and retention.[1]

For the firms that received competing offers from other locations (63% of the firms), 67% of respondents indicated that the PEAK incentives where more generous than the competitor offers. Only 13% of respondents indicated that the PEAK program was less generous.

The program is efficient and generous.  What is not to like?

But are the incentives effective in helping create Kansas jobs? The key set of questions are the counterfactural on what would the firms had done without the PEAK incentive. I asked two direct questions to managers. First U asked if the firm would have left the state of Kansas without a PEAK incentive, providing three possible answers.

1) Without the PEAK incentive would your company have left the state of Kansas?

Next, I asked about the firm’s expected employment without a PEAK incentive:

2) Without the PEAK incentive would you have company hired less employees or the same number of employees?

In response to question 1, only 22% of respondents indicated that they would have left the State of Kansas without the PEAK incentive program while 48% indicated they would have not have left the state. 30% of respondents indicated they were unsure. This question on relocation is a difficult one, since some of the firms were applying for PEAK incentives for expansion.

The second question is a more comparable measure of the impact of PEAK incentives. 67% of firms claimed that they would have hired the same number of workers without the PEAK incentives, while 29% of firms indicated that they would have hired fewer workers.[2]

Thus for most firms, employment decisions were independent of the incentives.

The final question asked about a specific policy. The Missouri State Legislature introduced a bill that proposed limiting incentive competition in the Kanas City area. I asked the respondents if they had heard of the bill (50% had) and if they supported this legislation. The largest percentage of respondents “neither supported nor opposed” the legislation (42%) with a smattering of responses in the supported or opposed followed by 21% of respondents indicating “don’t know”.[3] Thus there is only limited support, and limited opposition, for ending a very specific type of incentive competition in the region.

In summary, firms tend to like this program. Taxpayers probably should not.

[1] Note that these categories aren’t mutually exclusive. Respondents had the option to check more than one.

[2] 4% of respondents were unsure.

[3] The distribution is as follows: Strongly support (0%), Support (8%), Neither support nor oppose (42%), Oppose (17%), Strongly oppose (13%), and Don’t know (21%).

Auditing Economic Development

As part of a book project I’m reviewing information on the performance of investment incentive programs in the United States.  These programs are designed to help attract new investment, encourage expansion, and retain existing firms.  I’ve been collecting audits of these programs by state legislatures.

The general consensus from these audits are that the programs lack oversight and that it difficult to verify the performance of these programs.  That is putting it nicely.  Most of these audits range from critical to scathing.  Here are some news stories on the most recent audits.

  • A very critical audit of the Wisconsin Economic Development Corporation (the organization and the incentive programs).
  • The Texas Enterprise Fund critics include legislators that signed the legislation. Other Texas programs received similar reports including incentives from school districts.
  • Claims of lack of transparency and favoritism in the Utah incentive programs.
  • I’ve written about the The Promoting Employment Across Kansas (PEAK) program in the past.  The third part of their legislative audit should be out in Dec.  The first two parts were very critical of the program and lamented the lack of systematic data collection on the program
  • PEW has a nice overview of the past Minnesota, Louisiana, and Massachusetts audits.

More to come.

Some random links

A few interesting studies have popped up over the past few days.

Here is a clever paper on how public scrutiny affects how companies use tax havens. Using a high profile campaign in the UK, the authors find evidence that is consistent with targeted firms reducing tax avoidance strategies.

A pair of interesting NBER working papers popped up this week.

This paper examines the percentage of women that are top earners in the US. Summary: things are looking better, but they are still pretty bad.

This other paper examines how lending by lending by the Small Business Association (SBA) is associated with lower county income growth. That’s not a typos. The SBA is associated with lower levels of income growth.

Nolan McCarty’s post on what can be learned from the Goldman Sachs tapes is excellent.

Insider baseball on the pros and cons of research registration. I’m a fan of registration, but Josh Tucker makes some excellent points.

 

Updates by Nate

Blogging has been light for a variety of reasons.  A few updates.

First, my International Studies Quarterly article on how voters respond to incentives just came out.  See here (gated).

Second, I am presenting work at the Kansas Policy Institute conference on Wichita’s proposed 1% sales tax hike.  What do I know about this?  I know there is a proposal to create a jobs program that includes incentives.  Here is the program.

I think there will be some fireworks at this conference.  More to come on this very, very soon!

My Op-Ed in the Kansas City Star on Investment Incentives

A few months ago I wrote on op-ed for the Kansas City Star on my research on the “Kansas City Border” war.  I did some analysis of the main Kansas economic incentive program and found that firms that were given subsidies didn’t create more jobs than a control group of firms that didn’t receive subsidies.

My op-ed took months to publish, got stuck in a local section of the paper, and they changed the title.  My original title was: “Should you Pay $25 Million for 45 Fewer Jobs?”

They could have just said “no thank you”.

Anyway.  Here it is.