Do state-level "job creation" programs work? Hard to say, according to a new study. The belief in cutting business taxes as a reliable method for increasing local employment is so widely shared in the U.S. that every state - plus the District of Columbia - offers financial incentives for businesses to "create jobs" within its jurisdiction. So deep is that belief, in fact, that states frequently don't even consider a cost/benefit analysis necessary. At least that's the conclusion that a Washington, DC-based public policy center, Good Jobs First, reached in Money for Something, a review of 238 separate job creation programs cumulatively costing state governments over $11 billion in reduced taxes or direct payments.
With state budgets returning to normal about as slowly as the overall economy, more than a few governors and legislators will face yet another season of trying to bring in more and spend less - just to stay even. Granted, the numbers are not as bad as they were: the Center for Budget and Policy Priorities reports twenty-nine states estimating a combined $44 billion shortfall for Fiscal Year 2013, and even if that grows - as CBPP anticipates it will - it won't match FY 2010's record $191 billion in combined deficits. Unfortunately, though, it's also the case that budget balancing gets harder each year as more and more of the "easier" options have already been utilized. All of which should make Money for Something essential reading in state capitals.
The study scored state job creation programs on a scale of 100 according to three basic criteria: actual job creation or other quantifiable performance standards; wage standards above the minimum wage; and health insurance or other employee benefits. Individual scores ranged from Nevada's 82 to Alaska's 5 and the District of Columbia's 4, with an overall average score of 40.
For a sense of how states operate these programs, let's look at the biggest: California. The nation's most populous state scored a 23, ranking it forty-second. (And a closer look suggests that even this rating is overly generous.) Not surprisingly, it's home to some of the nation's highest dollar value job creation programs. Its Research and Development Tax Credit is the largest, with an estimated annual cost of $1,265,000,000 in foregone revenue, and its $670,000,000 Enterprise Zone Program ranks third. Money for Something gave these programs a 10 and 15 score, respectively.
This was not the Research and Development Tax Credit's first bad review. In 2003, a California Legislative Analyst's report found the program "appears to have been adopted simply as a means of generally encouraging more R&D activity within the state," rather than having any "specific economic development goals" and further noted that "we are not aware of economic evidence which, on balance, justifies a state credit in addition to the federal credit." As a result, the Analyst's Office recommended "that the Legislature consider reducing the credit or phasing it out over time, especially given the substantial direct revenue losses associated with the program and the state's current budgetary position," while suggesting that "direct research-related spending (such as through the University of California) may well be a more effective means of achieving the same objective." The program has, however, survived - along with the state's budget crisis.
The Enterprise Zone Program has been even more controversial. Like so many of the programs studied, there is no requirement that the jobs supposedly created in an Enterprise Zone actually be new jobs - as opposed to jobs transferred from another already existing facility; they need not last longer than a year; and the program carries no wage or benefit requirements. In 2009, the Public Policy Institute of California concluded that the state's enterprise zones "have no overall effect on job growth." Atypically, this assessment was actually taken seriously, to the extent that Governor Jerry Brown's 2011 budget proposed the program's elimination. Its backers managed to save it in the legislature, however, despite the fact the California Budget Project found "Corporations with assets of $1 billion or more claimed 70.3 percent of the total dollar value of EZ tax credits claimed by corporations in 2008, even though less than half of 1 percent of corporations that file tax returns in California have assets of $1 billion or more."
Money for Something also found California's smaller $100,000,000 Film and TV Production Tax Credit pretty much as lax as the other two programs and gave it a 10 as well. And the only reason the state ranked as highly as it did is that the study took the average grade of the four programs it assessed, and the fourth, the Employment Training Panel, which makes workforce training grants, rated a 58. But, at $36,400,000, the Employment Training Panel accounts for less than 2 percent of the combined cost of the programs under review. Were the state's overall grade prorated according to dollars actually expended in each of the programs, it would get a 12, a mark surpassing only Wyoming, Alaska and the District of Columbia.
How important is all of this? Well, the nation's biggest state not only has the biggest budget, but the biggest deficit as well - estimates run from $9 to 24 billion depending upon whom you ask - and when. With California having exhausted pretty much every budget trick in the book and officials facing an uphill ballot fight for a $6.8 billion tax measure, the idea that programs like those discussed here could drain $2 billion a year from state coffers based upon premises of job creation that appear to be speculative at best, would seem to be unconscionable.
And there are fifty other stories told in Money for Something, probably the largest study of its kind ever undertaken yet still covers only a small fraction of the estimated $70 billion a year the states expend - directly or indirectly - in the name of economic development. As anyone familiar with state legislatures may know, it's a lot easier to create a businesses tax incentive program (which will be hailed as improving the "business climate") than to eliminate one - or even question it, (which be invariably be called bad for the "business climate.")
Are job creation tax credits a serious strategy? Or just happy talk - and maybe good for the campaign contributors? There has never been a time when we needed clear answers to these questions more than we do now.