Corporate incentives look great the day a company announces it is coming to your town, when the CEO joins state and local officials at a news conference, promising new jobs and praising the tax breaks that closed the deal.
But how do those incentives look a few years down the road, after the state has forgone millions of dollars in tax revenue? And what would have happened had those incentives not been available?
The answers to those questions should be the basis of any argument in favor of incentives. But that’s not what’s happening, in Maine and elsewhere.
As the Pine Tree Development Zone program, Maine’s signature business incentive initiative, turns 10 years old, a state-commissioned report calls into question its effectiveness. The state’s economic development commissioner, George Gervais, defended the program in an interview with the Maine Sunday Telegram last week, but offered nothing substantial to back up his claims.
That’s the kind of information that should be at the fingertips of the official in charge of the program. If it’s not, we should ask why, and consider whether the program is actually creating jobs in Maine, or simply shifting the tax burden to those residents and businesses that don’t get a break.
The report, released in February by Investment Consulting Associates of Massachusetts, analyzed the state’s 60 corporate investment incentive programs, and came to a mixed conclusion.
Some of the programs, including the development loan program by the Maine Technology Institute and loan insurance and economic recovery programs through Finance Authority of Maine, showed a good return on investment for Maine taxpayers.
Overall, however, Maine’s return is poor – $159,000 spent per job created from 2010 to 2013.
The upshot of the Pine Tree Zone program is also opaque. The report says the program delivered total direct benefits to the state – in jobs, salaries and total sales – of $358 million in 2012. Meanwhile, the direct cost, in lost taxes, administrative costs, overhead and other expenses, was $457 million that year, suggesting Pine Tree Zones are a bad deal for taxpayers.
However, when considering the “multiplier effect” caused by the program, as more money is kept and spent locally, Pine Tree Zones come out ahead, with indirect costs of $3.6 billion compared to $5.3 billion in indirect benefits.
Clouding the issue further is whether the corporate investment would have happened without the presence of such substantial incentives, which for the Pine Tree Zone program means reduced state income taxes and electricity rates, refunds on employee withholding taxes, and sales tax and use exemptions for building material and property used for manufacturing.
The report addresses this question, and finds that if 75 percent or more of the companies in the program would have relocated to or expanded in Maine regardless of the incentives, the program’s benefits fall into the negative.
THE BEST DEAL
In addition, nationwide research suggests that state incentives play a relatively minor role in attracting investment. Instead, many companies see negotiations for state incentives as a way to maximize profits for shareholders after other, more important criteria have been weighed and a location selected.
Often these negotiations pit location against location to get the best deal. In one such illustrative instance, The New York Times notes in a piece about corporate incentives, AMC Entertainment was lured by a $36 million incentive package to move just a few miles, from Missouri to Kansas.
In that case, and others like it, no new jobs are created and no new economic activity is generated. The company simply gets another tax break, paid for by taxpayers in Kansas at the same time the state is making cuts to its education budget.
Many of the incentive programs require promises of job creation and investment. But little is done to make sure a company has followed through on its claims, and even less is known about the role the incentives played in the company’s contribution to the economy.
So Maine is handing out incentives worth hundreds of millions of dollars each year in a dubious competition to impress companies that may or may not be creating jobs, while taxpayers pick up the difference. It’s likely that some of the deals pay dividends, while others do not.
What Maine needs is a mechanism for telling which is which. Otherwise, it’s hard to say that the benefits go far beyond that initial news conference.