Tax Credits: Often Not the Panacea Promised

As a casual reader, it’s hard not to get optimistic when reading the statements state officials make when awarding tax credits.

On July 9, after awarding a multi-million-dollar tax credit package to a company that produces a sugar substitute, Gov. Jay Nixon’s office issued a press release claiming that 612 new jobs will be created in Missouri. The governor said:

These jobs will be a significant boost to Missouri’s economy and our manufacturing sector, and they’re another positive sign that our economy is beginning to move forward. I am pleased that my administration was able to provide a competitive package of strategic economic incentives to help bring these jobs to Missouri.

Statements from proponents of the tax credit for the Ford plant in Claycomo, despite the political finagling being done to push it through, sound reasonable. Sen. Victor Callan (D-Independence) told the Kansas City Business Journal that up to 3,700 jobs could be lost if the state doesn’t award Ford a large amount of state tax money.

But, although the claims can sound reasonable, they are only claims.

The problems of using tax credits to encourage economic development have been discussed at length: Tax credits often don’t create economic activity, but instead merely shift it to another location; tax credits are a form of centralized economic planning, which has a bad track record of encouraging economic growth, whereas lower tax rates do a better job of stimulating the economy; government officials have no special ability to predict future economic growth or success; and, of course, tax credits allow elected officials to play favorites.

In addition to the list above, casual readers should be skeptical of the future job claims made when state tax credits are doled out, because they are merely promises and forecasts. Studies have shown that job claims are often very different than what is ultimately accomplished with taxpayer money. A study by the Mackinac Center for Public Policy compared job promises made in press releases issued by Michigan’s economic development agency as it awarded tax credits to the actual outcomes of those programs. During a 10-year period, Mackinac found that of 127 projects that promised fully produced facilities, only 10 projects were completed on time and produced the number of jobs promised.

A report recently published by the Columbus Dispatch showed that Ohio is still waiting on some jobs and investment promised. In fact, as reporter Mark Niquette found, of the $1.6 billion in tax credits initially awarded in Ohio, only about 40 percent were ultimately redeemed. This disparity, as explained to me by Niquette over the phone, can be attributed to two factors: First, many tax credits awarded are never redeemed at all by the company, and second, some of the outstanding tax credits awarded may be redeemed in the future.

Of the companies that did manage to redeem Ohio state tax credits, roughly 1 in 10 jobs promised were not created.

Interestingly, one company that’s also dominating Missouri tax credit news failed to deliver on promised job creation in Ohio. Niquette writes:

Still, there are more than 100 projects that fell 50 jobs or more short with no action reported. At the top of the list is Ford, which received more than $1 million in tax breaks for a 2002 project to create 800 jobs for production of the Escape and Mariner in Avon Lake.

The data show “zero” jobs actually created because Ford moved the production to Missouri, officials said. The state said Ford stopped getting the tax breaks when the production left Ohio.

Only additional research can show whether Missouri’s Department of Economic Development has a tax credit track record better or worse than that found in Michigan, or that found in Ohio. But we all have to keep in mind that promises made in press releases about job creation and about the investment that will take place as a result of tax credits are only promises. In other states, those promises have a tendency not to bear out.