The literature associated with job creation incentives generally falls into one of three areas: 1) those articles that are supportive of a particular mechanism for encouraging job creation; 2) articles that are skeptical (or in some cases hostile) to the idea that government should encourage job creation; and 3) articles that attempt to take an objective look at government involvement in job creation. A common problem with job creation incentives for all of these articles is that there is limited empirical data in most cases. The lack of reliable data is related to the
political nature of the initial decision to establish a government program to promote job creation and to the extended period of time for the implementation of the
program.
For instance, when contiguous states offer job creation tax credits for businesses that either relocate or expand operations, and therefore create new jobs, there are political pressures for the state without such a program to institute one at least as good. Once a decision is made by a business owner to either relocate or to expand, and to take advantage of a tax credit program, there are all the time-consuming processes involving application to the program, acquiring land and capital
resources, establishing a business presence, et cetera. These may take more than a year. This is followed by a start-up phase and the initial hiring of employees. Eventually the firm will file tax returns. Only then, and if the firm is profitable, are the tax credits of any value to the firm. During this time interval the rest of the economy has changed because the economy is a dynamic process.
The articles reviewed are representative of the types of articles that are available. It is not an exhaustive review of the literature, for there are many articles that simply plow over the same ground. The last section of the literature review looks at some of the other programs that are in place to encourage job creation in other states.
Supportive
Those who are supportive of government programs that encourage job creation believe that increasing the economic health of an area is a function of government and that working people are preferable to unemployed people. The following articles are typical of this viewpoint.
Loren Scott and Associates in “The Economic Impact of Louisiana’s Entertainment Tax Credit Programs” (April 2013) discuss the entertainment tax credit programs in Louisiana. The important advantage they have over other studies is that they use certified financial results as the basis for their data. They use a standard input output table or multiplier table to do their estimations. And finally even with all of the things that they tried to do to avoid problems, they have the issues of insufficient numbers to estimate some of the impacts. The other take away from this analysis is
that none of these programs work in a vacuum, and the competing state programs and other states are major players in the success of a particular state program. Mulkey and Hodges (“Using Implan to Assess Local Economic Impacts,” Institute of Food and Agricultural Sciences) provide an introductory paper for using IMPLAN in Florida agriculture. The paper also provides a nice basic understanding of how IMPLAN is utilized to do the economic analysis.
The University of Wisconsin Center for Cooperatives has a paper dealing with the economic impact of cooperatives. They found the IMPLAN modeling approach useful for this purpose. There is a fairly detailed discussion of the advantages of using the system in this context.
Sampson Research in “Rules of Thumb for Interpreting Economic Multipliers,” suggests a number of rules of thumb for understanding multipliers. What's
important from our perspective is that, since we're dealing with economic effects at the state level, the effects tend to be larger as there are more connections between various parts of the economy.
The Tax Policy Center puts out lots of materials. “Tax Incentives for Economic Development” looked at various kinds of tax credits at the federal level - work opportunity expenditures and low income community tax credits. It suggests that Work Opportunity, New Market and Low-Income Housing Tax Credits encourage economic development at costs that are quite low compared to expenditures for other items the federal level, for example the mortgage interest deduction.
Skeptical
Those who are skeptical of government programs that encourage job creation believe that the market will arrive at a sustainable and better equilibrium if the government minimizes its impact on the economy. The following articles are typical of this viewpoint.
“Tax Credits as a Tool of State Economic Development Policy” by Howard J. Wall, Show-Me Institute #30, October 2011. This is an extensive paper that presents the arguments against government intervention and provides a summary of the existing research that supports this view. This is a good introductory article for those
wanting to better understand these beliefs.
A more populist rendering is a brief “news” story from CNN Money by Jeanne Sahadi titled, “States with sweetest corporate tax breaks,” which concludes that the biggest firms get the biggest tax breaks in the states of Michigan and New York. But, states and the federal government have done a poor job of measuring the effectiveness of these corporate tax breaks. (June 25, 2013)
Along a similar line is Leah Samuel’s “PA gives billions to companies, gets little back, studies say,” from PublicSource (November 8, 2012) in which she supports her argument through quotations and summary points of reports critical of government tax incentive programs in Pennsylvania.
Summers and Chawla, in “Tax Credits in California: Economic Growth Engine or Wasteful Corporate Welfare?” Reason Foundation Policy Study 412, January 2013, argue that tax credits fail to accomplish their goal of increasing economic
development in most cases and are probably counter-productive. These are views that are in harmony with the Reason Foundation and its mission statement and with the Howard Jarvis Taxpayers Foundation, which is also listed as supporting this research.
Gerry Bradley, Research Director for New Mexico Voices for Children, comes at this question from an unusual perspective. Although an advocate for government involvement in social issues, he questions the efficacy of tax credits in the article, “Economic Development Tax Credits in New Mexico: Are They Doing the Job?” April 2009, because the costs of the programs are readily available to the public, but the benefits are not. In essence, the information is collected by the state, but it is not available to citizens. Bradley argues that it should be public information.
Robert G. Lynch in “Rethinking Growth Strategies: How State and Local Taxes and Services Affect Economic Development” Economic Policy Institute, 2004, provides a comprehensive examination of the economic arguments for tax incentives, including tax credits, as a means for economic development. He argues that the better policy choice for increasing economic development lies in increasing public spending on public services that provide a more desirable environment for business growth. In this regard he differs from most of the preceding authors.
In the article, “More States Abandon Film Tax Incentives as Programs’
Ineffectiveness Becomes More Apparent,” Henchman discusses some of the reasons many states abandoned film tax incentives. The primary reason is because of the ineffectiveness of programs to generate longer-term economic development. Kansas is among the states that have suspended their film tax incentive programs. Obviously when one incentive program comes under scrutiny, other programs are also subject to greater scrutiny as the failure is cited by those who oppose these kinds of government programs.
Objective
Probably the best starting point for understanding the object viewpoint is the just published report, “States’ Use of Cost-Benefit Analysis,” Pew-MacArthur Results First Initiative, July 2013. The report considers both issues of methodology with respect to cost-benefit analysis and its implementation in the political arena. The
level of usage in all 50 states is measured and the best examples are discussed. Kansas is often in the group of states that is at the forefront of cost-benefit analysis. Sarah L. Coffin et al. did “An Evaluation of the Missouri Historic Preservation Tax Credit Program’s Impact on Job Creation and Economic Activity Across the State [Missouri]” that is based on nearly ten years of experience with the Program and the resulting empirical data. Although this Program is different from the PEAK
Program, the methodology and analytical approach is characteristic of the best objective studies.
Rothstein and Wineinger in “Transferable Tax Credits in Missouri: An Analytical Review” Federal Reserve Bank of St. Louis Regional Economic Development 3:2 2007, consider 53 legally authorized tax credit programs in Missouri and more deeply analyze the 6 largest tax credits issued. Among their conclusions is that making the tax credits refundable, as well as transferable, is in the interest of the state and the firm.
The paper, “Job Creation Tax Credits and Job Growth: Whether, When and Where?” is a working paper (2010-25) issued by the Federal Reserve Bank of San Francisco. Chirinko and Wilson look at the issues of job creation tax credits from an academic perspective. The answer to the questions are that, yes job creation tax credits do create jobs, but there is some question as to whether there is an anticipatory effect. In fact, there appears to be the possibility that some job creation is delayed as job creation goes down prior to enactment, jumps up with enactment of legislation, then gradually returns to a level slightly higher than was the case before the enactment of the job creation tax credits. Most job creation tax credits simply provide a credit against taxes owed – typically income taxes at the corporate level. However there are a few states, and Kansas is one of those, that provide a direct rebate of the tax. The rebate is more valuable to a firm, particularly a firm that has zero or very small income tax liability. The authors stress the preliminary nature of their work,
basically because there is a real problem with getting good data. It is interesting that they identify Kansas and Missouri as two states that do not have job creation tax credits, while the states surrounding Kansas, with the exception of Missouri, do have such tax credits. One of the issues they raise obliquely is whether job creation tax credits are a necessary defensive move by states that do not have them. From a public policy perspective, it is marred by a heavy reliance upon mathematics and statistical technique.
Jennifer Weiner, in an article, “Evaluating Business Tax Credits: Reading Between the Lines,” Policy Brief 10-1, published by the New England Public Policy Center at the Federal Reserve Bank of Boston, suggests that evaluations of business tax credit programs try to answer one or more of the following questions. “Does the credit induce the targeted activity?” “What is the credit’s overall economic impact?” “What is the credit’s fiscal impact?” And finally, “Is the credit cost-effective?” She argues for more comprehensive and rigorous evaluations that address all of these questions.
Low and McNamara, in “The Indiana Enterprise Zone Program: Fiscal Impact of a Job Creation Tax Credit,” published by the Center for the Study of Rural America at the Federal Reserve Bank of Kansas City (2004), look at the results of the Indiana Enterprise Zone Program. The Program attempted to reinvigorate areas, or zones, that had either high levels of household poverty or high levels of unemployment through the use of various tax credits. The authors used GIS mapping software to adjust existing data (that was available by either census block, zip code or county) to the boundaries of the enterprise zones. The authors determined that the static one- year effect of a proposed $1,500 job creation tax incentive would be minimal. Fred T. Goldberg, Jr., et al. in their article, “Reforming Tax Incentives into Uniform Refundable Tax Credits,” Brookings Policy Brief Series #156 (August 2006), make the case at the federal level to promote all socially beneficial behavior through the use of a uniform refundable tax credit. They argue that this is the most financially efficient way to apply incentives.
“An Assessment of Connecticut’s Tax Credit and Abatement Programs” is a
legislatively mandated report produced by the Connecticut Department of Economic and Community Development (December 2010). It considers all of the Connecticut programs and finds that some have low levels of participation, generally due to perceived application and reporting costs, some have low levels of benefits to the state, and some are worth continuing or expanding. The REMI economic modeling software was used for the analysis of these programs. “Appendix A: A Literature Review of the Economic Impact of Corporate Tax Policy Changes” considers states that have changed their tax policy vis a vis corporate taxation.
Zhong Jin, a fiscal and policy analyst with the Iowa Department of Revenue, in “Methodologies for Tax Credit Evaluation: The Iowa New Jobs Training Program” applied statistical methods to the question of effects of job training on wage rates and job tenure. Because he had access to individual data for about 95,000
observations (the number of workers was not stated) he was able to achieve some statistically significant conclusions. However, without access to that large data set, those methods would have very limited usefulness.
Jin in a more recent paper, “Iowa’s Targeted Jobs Withholding Tax Credit Evaluation Study,” (2012) finds that the direct costs (tax credit claims) are about 50 percent of the total new tax revenues from increased total individual income tax revenues. Thus, each dollar of tax credits claimed generates about two dollars of new individual income tax revenue for the State of Iowa.
In a report (#12-08) to the New Mexico Legislative Finance Committee titled, “Economic Development Department and Taxation and Revenue Department Job Creation Incentive: The Job Training Incentive Program, the Local Economic
Development Act, and Select Economic Development Tax Expenditures,” the authors attempt to evaluate job creation incentives in New Mexico. The report identifies issues of statutorily required confidentiality of tax data and a lack of consistent
reporting requirements, among others, as complicating the management and evaluation of these programs. The report is very critical of the current state of job creation incentives in New Mexico and the lack of oversight and accountability by the administering departments. This can be read as a case study on how not to do job creation from a state perspective. However, the report does suggest some positive actions for the state going forward.
“Characteristics of Effective Tax Incentives,” is a white paper from the Pennsylvania Budget and Policy Center (a policy research organization) that lays out eight
principles that should be considered in writing legislation and evaluating programs that are designed to spur economic development in Pennsylvania, or any other state. The goal in following these principles is to have focused programs with
transparency, accountability, and measurable outcomes.
Lawrence, Briskin and Qu, in “A Review of State Tax Incentive Programs for Creating Jobs,” Journal of State Taxation March-April 2013, provide a broad overview of the goals, types of programs, desirable characteristics and evaluation criteria that are important for successful job creation programs at the state level. They conclude that “well-designed programs are cost effective for reaching their goals.”
Descriptive
Job Creation Programs in Nearby States
State Program Name Program Type
Indiana EDGE Income Tax Credit
Illinois EDGE Income Tax Credit
Iowa Varies Income Tax Credit
Nebraska Varies Income Tax Credit
Colorado Job Growth Incentive Tax Credit Income Tax Credit
Oklahoma Quality Jobs Cash Rebate
Arkansas Varies Income Tax Credit/Refund
Missouri Varies Income Tax Credit
Texas Varies Income Tax Credit
New Mexico Varies Income Tax Credit
The table above shows that most of the nearby states have utilized some form of income tax credits to encourage job creation.
A report titled, “Comparison of Nebraska Tax Incentive Programs to those Available in Other States,”
(http://www.revenue.ne.gov/incentiv/annrep/11an_rep/neb_adv/neb_adv_compa re.html) provides a summary of Nebraska tax incentives with those of other states that offer comparable programs. The criteria for inclusion on the list are stated and the factors compared are briefly described for each state.
A brief news article by Tom Mooney about Lincoln Chafee’s promise to do an
immediate evaluation of Rhode Island’s economic development tax credit programs reveals the difficulties in getting already collected data from one state entity to another. In this case the Rhode Island Department of Labor and Training raised concerns about sharing information with the Office of Revenue Analysis because they said that federal law prohibit sharing some of the needed information with anyone else.
Based on the information at the Arkansas Economic Development Commission website (http://www.arkansasedc.com), Arkansas has job creation incentives that are essentially income tax credits available to the company based on numbers of employees that are qualified. It seems to the author of this report that income tax credits are less valuable to start up companies or growing companies that may have no income tax liability.
The Colorado Program provides an income tax credit based on net new jobs for a firm relocating to Colorado or expanding in Colorado with at least one bona fide
offer from a competing state. The usual requirements for pay rates above a threshold and minimum numbers apply to this Program.
The Illinois EDGE Program provides a tax credit that is usable on a carry forward basis for five years. The tax credits are not to exceed 10 years, are nonrefundable credits that can only be used as corporate income taxes and are nontransferable. Also, there are some requirements; 1) the company must have an offer from a competing state, 2) they have to invest 5 million in capital improvements, and 3) they must create a minimum of 25 full-time jobs. If the company has less than 100 employees, then they have to make $1 million in capital improvements and create at least five full-time jobs. This is a typical job creation tax credit program.
The Oklahoma Program is called Quality Jobs and provides a cash incentive back to the company up to 5% of new payroll for ten years. There are several variations on the basic Program, including a small employer seven-year cash incentives program and a 21st-century cash incentives quality jobs program.
Oakley et al., in “State Tax Incentives for Economic Development in Wisconsin,” Wisconsin Department of Revenue, 2011, discuss the Wisconsin tax incentives for economic development. The take away from this article is that without having someone to guide you through the process, you wouldn't have the slightest idea