Billion-dollar incentive deals are rising, but one new study finds the spending ‘irrelevant’

Even before Covid-19, various data points cast doubt on the value of economic development incentives. In the hybrid era, it’s even more dicey.

By Andy Medici  –  Senior Reporter, The Playbook, The Business Journals

May 18, 2023 Updated May 18, 2023, 2:47pm EDT

Tech giant Amazon.com Inc. played an economic-development version of TV show “The Bachelor” in 2018 and 2019 by dangling the promise of a second headquarters — and tens of thousands of jobs — to hundreds of cities across North America.

Eventually, after hundreds of pitches from every corner of America, it picked the nation’s political capital and its financial capital in Washington, D.C., and New York, respectively, for HQ2 — with Amazon (Nasdaq: AMZN) ultimately backing out of New York.

Just recently, it announced a delay of the second phase of that second headquarters, although it still claims it will eventually reach its goal of 25,000 jobs.

But a new report decries most state-level economic-development spending — that often comes in the form of tax breaks per employee or investment in office space — as “irrelevant.”

‘A rounding error at best’

The Center for Economic Accountability, which aims to improve transparency and accountability in state-level economic-development programs, analyzed marketing material and jobs reports from all 50 states and D.C., and found agencies claimed to have created or retained a combined 625,000 jobs in their most recent fiscal year.

That figure is less than four-tenths of 1% of the total workforce, even as the total aggregate cost of state and local economic development programs stood at about $95 billion combined.

“In a nation of more than 330 million people and an economy with 164 million workers, the 625,000 new jobs a year claimed by economic development agencies are a tiny drop in a massively expensive bucket,” said CEA President John C. Mozena. “For all of the claims that states’ economic development agencies are critical to economic competitiveness, their own data shows that their results are a rounding error at best for the economy as a whole.”

Mozena said those are the best possible numbers, since the study used the agencies’ own marketing numbers, and that state economies are massive, complete and constantly evolving, and subsidizing a few thousand jobs at a time is like “trying to get a cruise ship to turn by throwing pingpong balls at it.”

The report said independent studies show state and local economic development agencies tend to inflate the real-world job creation numbers because they take credit fully for every job created or retained by subsidized companies, regardless of how much of a role incentives actually played in that process.

Meanwhile, the number of billion-dollar subsidy deals has grown, with 12 separate billion-dollar deals announced last year alone, shattering the previous record of three in one year, with project amounts adjusted for inflation.

“American taxpayers spent enough on economic development agencies’ job-creation programs to fund almost a dozen state budgets, and we got, at best, one midsized city’s worth of jobs, spread thinly across the entire country,” Mozena said. “That return on investment is so bad, it makes Sam Bankman-Fried look like Warren Buffett. If private-sector investment professionals were delivering results like this to their customers, they’d be fired, in jail or both.”

Colorful metaphors aside, there is at least some consensus among economists and their research that targeted incentives to lure companies to an area or keep them from moving are of limited utility compared to more broad-based issues such as the overall business climate or access to amenities. That could mean a low or nonexistent corporate tax rate or a well-educated population of skilled workers.

“I think there’s a growing consensus that it’s just not a great idea to have very significant economic development incentives targeted toward one industry or one company,” said Anirban Basu, chief economist for the Associated Builders and Contractors trade group. “What really works is an overall business climate that really embraces entrepreneurs that live in the community or might move to the community.”

He cited Texas as one of several states with no personal income tax, which makes it attractive for high-net worth individuals to live there and start or move businesses there. North Carolina has also been working on its corporate tax rate and other issues to get businesses there.

How much do incentives matter?

That doesn’t mean there isn’t a role for big wins that can transform an entire economy.

In 1993, Alabama lured automaker Mercedes-Benz AG to the state with $250 million in incentives. And over the years, its automotive industry has boomed, and has in recent years allowed the state to beat out others in luring more car companies, becoming a regional center of gravity for the industry.

But for every high-profile success, there is also a bust. In 2018, Wisconsin rolled out a $2.85 billion incentive package for technology manufacturer Foxconn Technology Co. Ltd., which garnered attention from then-President Donald Trump. In 2021, that package was downgraded to just $80 million, and much of the original site sits unused.

“There’s still a role for targeted economic development but a much better role is to create a more broadly attractive environment,” Basu said.

He suggested economic-development agencies should focus less on incentives and instead act as facilitators to businesses, serving as connectors and working to identify issues weighing down businesses and to help solve them.

Creating a more friendly environment for businesses is a better bet when it comes to job growth, Basu said, citing as an example the rapid growth of artificial-intelligence technology.

Incentives for specific companies would traditionally have missed out on such growth, while broader economic factors might capture some job growth from rapidly evolving industries.

“How does one make a community attractive to entrepreneurs that are yet to be identified?” Basu said.

Steven Strauss, a visiting professor at Princeton University’s School of Public and International Affairs, said while many economists are dubious about most existing economic-development programs, it doesn’t mean well-designed, efficient programs are impossible.

He agreed corporate incentives are less likely to be beneficial than investing in education, workforce development and job training, as well as infrastructure. He also suggested one of the best long-term economic-development programs is early childhood education.

How incentives factor into company decisions

Economists often point to the research of Senior Economist Timothy Bartik, at the W.E. Upjohn Institute, who, in a 2019 book, found for new facility locations or expansion decisions, companies often prioritize other factors — and found only 25% of the time do incentives alter the outcome of a relocation or expansion decision.

Of course, it is hard to tell in any specific deal whether incentives were the dealbreaker or not, but that could potentially lead to “wasted” incentives — although, in many cases, companies are choosing from a range of states offering various incentive pages.

A Kauffman Foundation study from 2014 found companies that received incentives were no less likely to generate new jobs than similar companies that did not receive incentives.

One relatively new area of economic-development incentive focuses not on the companies but on the workers themselves. Tulsa, Oklahoma, instituted the Tulsa Remote program in 2018 to lure remote workers with incentives of $10,000 to relocate. By June 2021, Tulsa Remote had received 20,000 applications and invited about 2,700 workers, with 763 ultimately moving.

A study in April of 2022 by the Center for Regional Economic Competitiveness and Smart Incentives found remote worker incentive programs in Vermont and Tulsa have been effective at generating net economic gains at relatively low costs. And dozens of cities across the country have implemented their own remote work incentive relocation programs.