The Palmetto Insider

The blog of the South Carolina Policy Council

Economic Incentives Fail … Again

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With state lawmakers telling us that they really don’t know (or seem to care) how much the Boeing incentives deal is going to cost taxpayers, it’s worth bearing in mind that the incentives game is a race to the bottom. As detailed in Unleashing Capitalism, numerous academic studies have concluded that economic incentives don’t work. Consider the following:

  • A 15-year survey by Kansas State University professor Margery Ambrosius found there is no evidence incentives increase manufacturing activity or employment.
  • Researchers Lawrence Litvak and Belden Daniels likewise conclude: “Most state policies thought to promote economic development do not work –  they just cost the taxpayers money. The preponderance of the evidence is clear: state taxes represent a small cost of doing business; state tax incentives and subsidies do not change business decisions.”
  • Specific to South Carolina, economists Pete Calcagno and Frank Hefner have also found that “selective tax incentives create distortions in the economy and limit the ability of the private sector to generate economic growth.”

To these studies we can add another, highlighted in a recent Wall Street Journal op-ed. According to the study on tax incentives to high-tech firms in Pennsylvania, state “tax and incentive codes provided ‘little appreciable advantage or disadvantage.’” Here are four highlights:

1) High-tech job creation (or loss) is overwhelmingly driven by events within the state – not by interstate relocations. … Whether positive or negative, the net movement of high-tech firms and jobs across the state’s borders each year is almost negligible compared to the impact of instate activity. Long term, interstate movements have been nearly a wash: over the same period, the state experienced a very small net in-migration of workplaces and a very small net out-migration of jobs.

2) “Globalization is the dominant issue in high-tech job out-migration. … International job flight from Pennsylvania dwarfs domestic job shifting – by a factor of 30 for the years 2001 through 2006.

3) “High-tech deals can be ‘old economy,’ costly and disappointing. … Despite their high costs, the deals are surprisingly fragile, perhaps reflecting higher volatility in high-tech sectors. For example, North Carolina gave its costliest-ever package to Dell, but the computer assembler recently announced that more than 900 jobs are headed offshore after only four years of below-projected employment.

4) “Tax-based incentives are low-impact but high-cost. Cumulatively, our findings – especially our theoretical-firm modeling and our long-term business-establishment analysis – mesh with a large body of national evidence that finds tax reductions, exemptions or credits to be crude tools for economic development. They can only exert a very small marginal influence on corporate investment decisions because other cost factors such as labor, occupancy and other key inputs are far larger than taxes (or tax breaks). Given this reality, for the vast majority of companies, tax breaks are windfalls, not determinants, and are therefore wasted.”

The best way to create jobs in South Carolina is to lower taxes and fees and to enact genuine school choice educational reform. In the meantime, we also need transparency regarding economic sweetheart deals like that extended to Boeing and Sembler.

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Written by SC Policy Council

January 20, 2010 at 9:31 am

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