Playing the Incentives Game

Two questions dominate the debate over tax breaks and other financial incentives that states and localities offer companies to attract new operations or retain existing ones: On balance, is this practice good for the citizens? And do companies really care if they get these goodies or not?

The answers are maybe, and maybe.

A recent New York Times “investigation” of the issue found that governing entities are “giving up more than $80 billion each year to companies” across the U.S. as mayors and governors “desperate to create jobs [are] outmatched by multinational corporations.” At a time of unprecedented fiscal strains for states brought on by the Great Recession, an ambiguous economic recovery and the Obama administration’s own financial woes, such a narrative of corporate victimization of hapless government officials can strike a popular chord.

The trouble with this portrait is that even the Times admitted a “full accounting” of whether the awards end up being worthwhile disbursements by governments “is not possible.” Also, most of the story dealt with blows administered to localities by plant closings in the wake of the 2009 bankruptcy of General Motors—a one-off disaster for economic development if ever there was one.

What’s more, these incentives aren’t nearly as dear to “scheming” business executives as it might appear.

“State and local incentives” placed just fifth on the list of site-selection factors considered by company executives in the most recent survey by Area Development magazine. “Highway accessibility” was No. 1, followed by “labor costs” and “availability of skilled labor,” which tied for No. 2, then “corporate tax rates.” “Occupancy or construction costs” tied with incentives for No. 5.

The magazine’s companion survey of site-location consultants placed state and local incentives as No. 7, also adding “proximity to major markets,” “available land” and “energy availability and costs” as priorities ahead of incentives.

“There’s not strong evidence either way as to whether [incentives] are important [to companies] or not,” says Jared Konczal, senior analyst in research and policy at the Kauffman Foundation, the Kansas City-based outfit that studies American entrepreneurship. Adds Mark Arend, editor-in-chief of Site Selection magazine: “There is no yes or no.”

Many people involved on either side of such negotiations leave no doubt that other major factors dwarf the allure of incentives per se, for states as well as companies.