Why Governments Give Away Economic Incentives That Increase Inequality
Amazon’s headquarters decisions are drawing attention to economic development incentive programs designed to bring businesses and jobs to states and localities, while local opposition in New York drew attention to their role in inequality. Why do states and localities continue to offer them, despite academic research showing they are ineffective? Nathan Jensen finds that voters reward politicians who offer (even unnecessary) incentives, meaning they keep on offering bigger checks. Cynthia Rogers finds that state incentives increase the gaps between the rich and the poor, but they remain an ever-popular tool.
Studies: “Incentives to Pander: How Politicians Use Corporate Welfare for Political Gain” and “Income Inequality and Economic Development Incentives in US States.”
Grossmann: This week on the Science of Politics: why governments giveaway business incentives that increase inequality. For the Niskanen Center, I’m Matt Grossmann.
Amazon’s headquarters decisions are drawing attention to economic incentive programs designed to bring businesses and jobs to states and localities and local opposition in New York is raising their role in rising inequality. Why does states and localities continue to offer them, despite research showing they’re ineffective?
Grossmann: This week, I talk to Nathan Jensen of the University of Texas about his new Cambridge book with Edmund Malesky: Incentives to Pander: How Politicians Use Corporate Welfare for Political Gain. He finds that voters reward politicians who offer even ineffective incentives and so they keep on offering bigger checks. I also talk to Cynthia Rodgers of the University of Oklahoma about her new Review of Regional Studies article with Joe Wang and Steven Ellis: “Income Inequality and Economic Development Incentives in US States.” She finds that state incentives increased economic inequality, but they remain an ever popular tool. Both say they’re building a broader research literature that does not find many successful incentives.
Jensen: Biggest limitation of some of our work is that we are just reinforcing the conventional wisdom on the economic impact of these programs. I think most research shows that incentives aren’t particularly effective. They’re largely going to companies that are already coming or already expanding. So that part, you know, we do some of that research in our book and honestly, we’re not differentiating ourselves on that dimension. What we’re taking is, you know, assuming politicians know this, why would they still use these programs? So, we are very much accepting the conventional wisdom and extending. We provided some alternative tests in our book and a series of papers. But yeah, these things don’t work. The question is why use them.
Rogers: There’s this huge disjoint between those who study incentives in academic literature and those who use incentives, the practitioners who use them as tools and see them as very valuable tools. So the narrative that incentives are tools is really compelling to those who want to seem business friendly and to be acting, to promote economic activity in the state. So attracting a farm has tremendous, like Amazon headquarters, has really big political capital value there, but the eventual impacts are rarely studied after the fact.
And so in a 2000 paper with my coauthor Steve Ellis, so we show that there’s this prisoner’s dilemma, you’re compelled to compete with increasingly generous offers to send a pro-business signal. But if everybody does this, the gain from offering incentives is small. It could be even be negative in economic terms. So I would say the best summary of the literature would be a statement to the effect that we don’t know enough about these to know if they work or even to know how to use them properly.
Grossmann: Jensen says voters think they work, even when businesses decide for other reasons.
Jensen: If you look at surveys of what the public thinks matters for firms, and these are anything from taxes, both state income, property taxes, they tend to think different regulations matter. They think policies matter a lot. But if you actually look at the surveys of firms themselves, highways, access to highly skilled workforce, ports, airports, infrastructure seems to matter in human capital a lot more than policies.
Where those kind of false beliefs of voters come up I’m not sure, but at least one potential story is when you hear politicians talk about the investment environment in states and cities, they talk about these policy letters, right? They talk about not the long term impact of having invested in infrastructure, they talk about the short term tax policy that they’ve made, but it is a striking contrast between the views of the masses and the views of firms or elites on these policies.
The one thing, and you ask, you know, what’s the limits to what they’re willing to support? The one thing we really find in our surveys is saying that a company got $1 billion, doesn’t reduce the amount of support that voters are willing to give its programs. The big change is when voters understand that there’s some other costs.
Grossmann: And Roger says, you can’t just say we only lose the money if they come and bring us more because they’re not that important for firm location decisions.
Rogers: That is the narrative. While everybody who offers these, we need to offer them to be in the game for anybody to be interested in our community, they won’t come if they don’t.
Well, I think the compelling argument is if you look at the basic location factors that are most important to a firm, the old adage is location, location, location. Incentives can only make a difference on a margin if all the other factors are equal. And as it turns out, all those other factors aren’t equal. How close are you to market demand? How close are you to your supply inputs? What’s the cost of energy? What’s the labor force like? Those sort of fundamental factors that go into a business decision dominate incentives.
So I think the argument, as I said, it’s a really nice narrative, “Oh, we have to do this. This is what businesses are looking for.” But at the end of the day, if you look at what you gain, how much you spend, and how much you get in a net increase? The papers that look at this carefully, just don’t find those effects.
Grossmann: Jensen got into this line of research after seeing a particularly egregious example: firms moving back and forth across the Kansas City border with the same employees, but each state claiming they’d brought new jobs.
Jensen: So I started looking into this because I’m an international relations scholar studying tax competition across countries. And I was doing it in a series of projects looking at, you know, again, global foreign investment. And I was in Saint Louis, teaching at Washington University in Saint Louis. And I had read in the local papers about these firms that just came to Missouri and this was the Kansas City area. And these are firms that literally moved across the border. You’ve been to the Kansas City area, you know, you could go for a run and not really know whether you’re in Kansas or Missouri. So you know, it’s one metro area.
But you get a firm that’s moving five, six miles across the border, and that’s being counted as new investment, right? So that this company came to Missouri or came to Kansas, whatever direction you’re going. And we’ve generated all these jobs. And it’s the same people, right? Working for the company, just driving across the Kansas border or driving into Missouri.
So this is where we start. And this was not new because there was an exposé in in the early 2000s that talked about the border war, then there was an exposé in 2012 in the New York Times where they talked about the Kansas City border war. John Oliver talked about the Kansas City border war. I mean, it’s simple story of, you know, forget about the big picture of economic development for now, this is just a really smoking gun. We see companies moving, jumping back and forth to reset their economic development incentives, for very little real new impact in the metro area.
Grossmann: Rogers says politicians know it doesn’t work sometimes, but they just don’t understand the broader costs.
Rogers: I think everybody knows that there’s this game of recruiting businesses and that has lots of difficulties. It’s really hard to win. Even if you win and you succeed in attracting a business, you might end up paying more than the value the business generates. That’s called the winner’s curse. And what our research does is it asks a different question that hasn’t been looked at in the research and that is, do states that spend more on incentives have worse outcomes in terms of income inequality, and there’s reasons to think that it would lead to more inequality, particularly if you think that these sorts of programs aren’t effective in generating new economic activity or if you think that the gain in activity doesn’t actually trickle down to lower income folks.
Grossmann: So let’s dig into the new research. First, Jensen noticed that politicians are not at all shy about these incentives.
Jensen: Our project is not about the kind of secret dealings, even though we’ll talk about the lack of transparency but about the really public credit claiming of company’s business relations. And again, this is thinking like a big check and a ribbon cutting ceremony, as opposed to something much more under the table dealings.
Grossmann: He says most firms are coming regardless of incentives, hiding their costs.
Jensen: What is much more private, much less transparent is the actual costs of these programs. And I swear this gets to your question, because one of the big costs of these programs is most of the research suggests companies are largely already picking a location and then they’re minimizing their taxes, once they pick those locations. So, there’s a great kind of academic survey of 34 different studies. This is Tim Bartek at the Upjohn Institute. And the findings were that between 75% to 98% of companies were coming anyways, even without the incentive program.
So best case scenario, you know, one out of four companies is actually being swung by these incentives. The other three were coming anyways. I did a study in Texas and I found 85 to 90% of companies were coming anyways.
A lot of these, it’s obvious to the listeners, they’re oil and gas companies, they’re pipelines, literally a company that can’t go elsewhere and they’re receiving incentives. So that’s where we kind of reject the idea of, oh you know, they wouldn’t have come here anyways, so any additional benefit is positive that the academic literature just really strikes that down and saying, you know, at best, the best design program, you’re maybe swinging one in four.
Grossmann: He even asked some of the firms and many admit they’re coming regardless of the incentives.
Jensen: I just asked the firms. I did a survey of the firms that receive these incentives and asked these firms, “Would you have invested without this incentive?”
And the majority of firms said that we would have invested anyways, we would have hired the same number of people. So even though we could think there’s biases in this survey, maybe some will say that it was important even if it wasn’t, even taking that at face value. Again, we find evidence over and over again that most of these companies were coming anyways.
There was a great study in North Carolina where they asked a bunch of firms about incentives and most of the firms that received incentives didn’t even know that they received incentives. So decision makers who made the location choices didn’t know and they probably delegated to their tax people after the fact to get these incentives.
Grossmann: The process is based on politics. The need for politicians to get credit and avoid blame.
Jensen: There are lots of mechanisms, right? There could be a mechanism that they think, maybe this might work. There might be a campaign contribution mechanism, but we try our best to isolate, you know, even if there’s no money in campaign contributions. Even if a politician knows this isn’t effective, is there still a motivation to do it?
And we do this in a number of different ways. One is just a survey experiment and again, if your viewers are familiar with this, it’s essentially a survey where we’re giving different potential scenarios and whether or not a firm came with incentives or a firm came without incentives. And the simple story is when we give these different options, people actually reward a politician more if they attracted a firm with incentives than with that, and let me just pause for, you know, if there’s an economist listening, you would probably think in terms of cost benefit, you’d prefer to get an investment for free, right?
You didn’t pay anything. You tax it at full freight. But our research suggests that a governor can’t take credit for it, that the governor doesn’t get the credit for bringing in the Amazons or the Costco. I mean, there’s some Costco investments, BMW factory, that you actually use that to take credits. So we find in this survey we find clear evidence. We also find clear evidence if you know a company’s not coming, a great way to make sure you don’t get blamed for it was to put the biggest incentive on the table. So what we would say is that there’s this political strategy, whether you know if the firm is coming or not, offering incentives gets you credit if they come, or reduces blame if they don’t come.
Grossmann: There’s a common cycle. Politicians criticized others for doing it. But then go back to the same game.
Jensen: Incumbents talk about these programs, about how much these programs have generated jobs. Challengers tend to criticize these programs. And then if the challenger wins, they become advocates of these programs. And we see this pattern across states and if there is a criticism of these programs, New Jersey just had a scathing audit of their economic development programs. The current governor’s response has been, “Well,” that’s been under Christie,” right? That’s under his watch. But the programs haven’t changed, right? It’s still the same program there. So I think it’s very much not a Republican/Democrat. It’s an incumbent strategy where it’s an effective tool for governors to take credit.
Quick point that’s important is, in many states there is literally a governor’s deal closing fund. So if we think about a clear lever the governor can pull, right? A governor can influence legislation at the state level, but what can a governor do on their own?
They actually have these funds in a number of states, Texas being one of them, where you are the person responsible for offering this incentive. So it’s as clear of responsibility as you can kind of imagine. There’s a whole industry associated with this. There’s lobbyists, trade associations, chambers of commerce, which tend to be very strong advocates for these programs. But it is striking to me that this switch from being a challenger to an incumbent and how often we see this across states.
Grossmann: Jensen says US institutions make our pattern worse than other countries.
Jensen: The US is pretty exceptional. The US is both exceptional on a number of dimensions, but we have some of the largest incentives and they’re largely at the sub-national level, meaning states, but also many cities. Counties offer a lot of incentives as well and often stack together, so you’ll get a package of Amazon HQ2 in New York was a good example where they got a package from the state level and the city level.
You move outside the United States, many of these incentives come from the central government. So there are incentives, but these incentives are given by the federal government. There’s not as much sub-national competition and in a lot of countries, there’s a lot more regulations on the ability to offer incentives.
The best example is in Europe where there’s state aid rules, so European countries you could imagine being in a competition, incentive competition with each other, but there are strong rules in when you can offer incentives and how big those incentives can be, and then there’s some transparency in reporting these incentives. So the European Union is a place that you could imagine looking like the US with countries competing against each other, but there’s a lot of regulation minimizing this.
Move to Brazil. They have very fierce competition across states, similar to the United States, but there’s been numerous kind of federal attempts, central government attempts, clamping down incentives.
The US has one of the rare cases of the wild west, where there’s essentially no limit at the federal level what states can offer. Because of that, I mean we see both really large offers. We see nontransparent offers, meaning many of the states don’t report what they offer and then these mixes of anything from a cash grant to a 99 year tax abatement.
Grossmann: Even the worst programs like film production incentives, where all the jobs are temporary just won’t go away.
Jensen: Film incentives, they never die. This happens. There’s a scandal, they get dismantled. Missouri’s talking about redoing theirs. New Mexico is talking about uncapping theirs, making it unlimited. New Jersey has just funded theirs. Texas is talking about expanding theirs, so what’ll often happen is they’ll go away for a little bit and then they get revitalized and again, in terms of programs, it’s probably the worst program. That and sports stadiums, probably the worst program, but you see this, these zombies, that they’ll die briefly and then they show back up again.
Grossmann: It is difficult to estimate the losses, because a lot come from school districts.
Jensen: Estimates are between $45 billion and $90 billion per year, in terms of abatements. That complication or total incentives, the complication is these are not always at the state or city level. In particular, they seem to disproportionately harm school budgets so that these are siphoning off potential revenues from schools.
But again, the short answer is we’re not exactly sure the depth of the problem because we’re just starting to get reporting in from school districts under a new set of rules of how many millions of dollars they’re losing in terms of tax revenues.
Grossmann: He says attempts to claw back money when deals go bad don’t work either.
Jensen: Many of these companies were coming anyways, so they’re going to promise a hundred jobs and they’re going to really create a hundred jobs and you’re going to pay out the incentive for a hundred jobs. But if they were coming anyways, right, the claw back doesn’t protect you at all, meaning the claw back only protects you if they didn’t create the hundred jobs. It doesn’t protect you from giving incentives to companies that were coming anyways.
The other is, the simple story is often these claw backs are optional. So, and I’ve seen in my research here in Texas, but we’ve also started looking at other states that often when a company doesn’t comply with what they promised, they’ll go back and renegotiate with the government saying, “We said this many jobs, can we change what a job is?” The definition of a job. “Can we change the job schedule? Can you just give us a lower number?” And we see this pretty commonly, and again, why is this not surprising to us? Governors and economic developers don’t want to see these companies that they gave money to fail, right? So you can imagine that it doesn’t look good for anyone when they don’t comply. This is the other problem with the claw back. They’re only effective if you actually enforce them. And we think there’s both empirical and theoretical reasons why we think, yeah, these are not really going to be enforced.
Grossmann: And these incentives are often funded with regressive taxes.
Jensen: Really simple story is that one of the best ways to figure this out is we looked at when the programs were built, what did they do? How did they fund them? And there’s a number of programs across the country, a lot of them in Texas, but across a number of states, where they’re funded through sales taxes.
So they have a sales tax that’s enacted, half a percent, quarter percent, 1% and that sales tax is being used to fund these incentive programs. And as you know, there’s nothing more regressive then a sales tax. So this is a really good example of a regressive policy.
Grossmann: That fits well with the research by Rogers, Wang and Ellis who find incentives lead to higher inequality.
Rogers: Basically this story is that state governments offer incentives to try to attract business and the goal is to increase economic growth in a state. And so there are research questions about the effectiveness of this practice of offering incentives.
What our research does is it looks at the impact of offering incentives on inequality or equality outcomes across states. And our results suggest that states which offer more incentives display greater income inequality. So it seems that offering incentives to businesses results in a reverse Robin Hood effect, where money is transferred from poor people to rich people.
Grossmann: There are several potential mechanisms for the relationship from sales taxes to lower spending.
Rogers: I think there’s a variety of mechanisms and it would really depend on the particular state and the state’s tax and spending policy. So in a state like Oklahoma that does rely on sales taxes a lot, if you’re giving away incentives that don’t actually increase economic activity in the tax base, then the mechanism would be by higher taxes than you would otherwise need. Or maybe more representative again of Oklahoma would be lower provision of services. So like underfunding of other services, say education or welfare programs.
Grossmann: But she acknowledges it’s just one factor among many in rising inequality.
Rogers: Our goal was to show that using incentives or the use of incentives was going to be related to the widening of inequality, that this is part of this story. So pinning down a precise effect. We have a number that we estimate in our model, but I would have no confidence that that is the number or the right number. This was a first crack at this. And basically, what we’re trying to say that incentives are part of this cocktail of tax and spending programs. It’s really hard to pinpoint the impact of a particular tax program or incentive program from the other effects.
Grossmann: Rogers says it’s hard to track how big the programs are and she’s sure we missed some.
Rogers: Measuring the value of incentives offered by state governments or local governments is very difficult. There’s no centralized or uniform reporting and incentives can be paid in multiple years. Maybe they’re not reported, maybe there are tax breaks. You don’t necessarily see a line item that says, “We spent this much on this incentive for this firm.” So that makes all the databases that claim to report these, I would say, suspect.
So, we used a database that was collected and that’s continually being assembled by Good Jobs First. And that was one of the more novel attempts to comprehensively track incentives offered by US states.
Grossmann: But it adds up to big money blowing a big hole in state budgets.
Rogers: Virtually every state offers some kind of incentives in one form or another. We think there’s been increasing attention to offering incentives because the value of these deals and the number of these deals are increasing. So the estimates that I’ve seen would range somewhere from $45 billion that was Bartick looking at export industries, to say $80 billion as reported in the New York Times. These are estimates of annual spending on EDIs by states. I would say in comparison to, if you wanted to put this in comparison to other state government programs, in 2018, state governments combined spent $122 billion. So we’re talking big money. We’re talking increasing over time. Pinning down the precise amount? I think that’s really hard to do.
Grossmann: Governments keep using unreliable consultants to promote projects, without even evaluating them.
Rogers: The role of private consulting companies in how they help to market these programs and incentives to policymakers and how they help local governments convince the general public to support these sorts of things. So Haywood Sanders wrote a book in 2014 that was called Convention Center Follies and he started down this path and pointed out how unreliable and really off base some of these projected benefits are that are produced by these consulting companies.
So I find it astounding that governments hire consulting companies to conduct feasibility studies, without assessing the quality of their previous estimate. To me, this is like drafting a baseball player based on the number of at bats rather than his batting average. And I can’t figure out why policymakers don’t look at quality measures of economic predictions when they hire these companies. And I don’t understand why the taxpayers don’t demand them to justify, “Wow, these are good estimates or bad estimates.”
Grossmann: Both Rogers and Jensen say the Amazon case largely fits the broader patterns, but might signal political change.
Rogers: Arguably, the Amazon experience in New York City verifies what academics have been saying about economic incentives for years. Amazon’s actual business decisions were driven by basic location factors. Now, staging a competition for HQ2 allowed Amazon to create this bidding war. Right? We saw all these communities that were throwing their hat in the ring.
And that allowed Amazon to try to extract some extra rents. Well, the residents of New York City got angry. Amazon had to punish the area. They really didn’t foreclose on any activity in New York City and they’re gonna in the end, end up doing what they were going to do anyway, locate in the places that offered the best locations for their business. So I guess the short of it is the New York City example is people waking up to how this prisoner’s dilemma works in these bidding competitions.
Jensen: Amazon was very unique in the sense that they went out publicly and had a call for proposals and 238 locations put in proposals. That is not common. That’s nowhere close to common. And a lot of communities that have no shot clearly put in proposals and this is a very public ordeal that originally gave Amazon a lot of positive PR, which started breaking more negative starting in January, when you can actually see in public records requests Amazon asking cities to clamp down on the PR. “Don’t talk about this so much.” This is starting in January when they cut down to 20 finalist locations. So, there’s a weird starting point. This is not common, but most of the rest of the story is pretty common and that being, there was a secret deal offered to Amazon and this was across most locations, except for maybe Boston and Toronto where they were publicly upfront about what they were offering.
It was not a transparent deal. Public records requests in a number of communities try to get what was being offered, and they were denied in many places because there is exceptions to economic development. Again, this is my own world when I tried to get some of these records, not just for Amazon, for any company. A
And then a lot of these were routed not through government agencies, but through nonpublic agencies like chambers of commerce or different public/private partnerships that are not subject to public records requests. So again, first part of the story, what’s unique here? It was actually unique of how public they were up front. But what’s not unique is that the actual details were behind closed doors. This was not transparent, and none of these deals are. When you usually see these deals being announced is when the governor announces it.
And this is in Texas, it’s actually in their contract. The governor gets first right to announce our big program Texas Enterprise Fund. So you have the company can’t even leak out that they have this incentive, they want the governor to authorize the use of talking about their programs.
So the first part of the lack of transparency, common. New York gave local property taxes and state incentives. Those were existing programs, right? There’s nothing unique about this. They just scaled up, right? Amazon size. But they were just offering what was there and that’s a number of states did this. They just upped the size of what they were giving anyway, so it’s kind of a supersized, but common. It’s the same deal that’s being made across many other communities.
Grossmann: But the Amazon/New York blowup may provoke a need for politicians to build coalitions behind these incentives.
Jensen: I do hope that there is at least some kind of lesson that, you know, what I think really happened in New York is the governor and mayor made an offer that was incredible. They made a deal with Amazon. But because they didn’t bring in the broader community, they messed up. And it’s really on them, right? That they could not build a coalition, and the way you build a coalition isn’t signed something and then try to impose it. It’s really to bring people in.
I spend a lot of time looking through Amazon’s, the proposals by different cities. Across all these different cities, I didn’t see a single environmental group sign on. A single environmental group included in the discussion. Very few labor unions were included in the discussions. So I would think at least from the mayor level or governor level, hopefully the lesson would be, “We need to get buy in early if we’re going to do something like this,” and this means less kind of opaque process. Not only just transparency but actual feedback like, “Let’s talk to the community before we make this offer.” That is not common in economic development. As I said, these tend to be secret deals, but that would be my hope would be the lesson is, you know, if you’re going to do this, you’re going to need a buy in. And it’s Cuomo in particular, but also the mayor, de Blasio, who overstepped. They again made a promise they couldn’t keep.
Grossmann: And Rogers says it shows the need to educate voters.
Rogers: Educating voters about the problems with incentives can help address this issue. New York City voters don’t seem to be rewarding politicians for business incentives anymore, so maybe we can learn from that what happened. I think there’s a role for folks that study this stuff to help educate the people about the evidence suggesting that these sorts of programs don’t work in the way that they’re touted to work. But I think academics are actually pretty bad about educating the general public, so we need to step it up, ad hoc and away that folks can understand the point of the message.
Grossmann: Jensen and Rogers have both been active in speaking directly to policy makers, but Jensen says the experts are up against those with money at stake.
Jensen: There are a whole lot of proponents in particular, you know, I’ve testified in the Texas Senate and I was talking about a program I was just giving my research on an abatement program that was largely giving abatements to actually wind farms that were coming here anyways, an oil and gas pipelines and oil and gas manufacturing. So, I was presenting a left-leaning think tank and a right-leaning think tank were also testifying, criticizing the program and then the whole rest of the room was a sea of expensive suits, of lobbyists for the wind and oil and gas. Environmental groups, along with the Texas Chemical Council. So you had this weird coalition and I think the point of this story is that most of the opposition to these programs has no financial incentives to pose. Meaning, it’s unlike trade where you can imagine some groups being pro-steel tariffs and other companies being anti-steel tariffs, because it affects their bottom line.
There’s no one with financial skin in the game that’s kind of opposed to these programs. So most of it is good governance folks. You see a lot on the left. You see a fair amount of kind of Tea Party or libertarian groups on the right. Both saying the same thing. They don’t like corporate welfare. The one group that I wish that would jump in that I do think really is affected by this are teachers. I think these programs are really costly, especially the property tax abatements, so teacher’s unions, national teacher associations. These are the groups that should be most opposed and you see little bits of criticism, but I’m often kind of surprised while we see these protests. Teachers protest across the country, but they are not linking some of their financial problems to these exact kind of academic programs.
Grossmann: Rogers has helped develop a legal proposal to address it, but she still sees increasing public knowledge as the path forward.
Rogers: Our proposal is that citizens of local governments should be able to sue those governments for poorly thought out economic development incentives in the same way that shareholders can sue private firms for poorly thought out business deals. So literally if you didn’t do your due diligence like a CEO or board of directors of a private company would, that citizens could sue your local elected officials.
More generally though, is concerns about economic development incentives are becoming more public. Residents of these incentive-granting localities are becoming more savvy and they’re becoming more suspicious of the usual sales pitch. So we can hope that the continued press to educate people, let them understand what’s going on and the press to actually evaluate incentives after the fact. I think that’s a missing piece. A company will come in, they’ll get a big incentive deal. Elected politicians, you know, put a feather in their cap and say, “Look what I did.” And nobody ever looks back to see how it turned out. So, I think in the more we can look back and evaluate these things, the more we can show folks, “Hey, maybe this wasn’t such a good thing after all.”
Grossmann: But Rogers does see some positive trends in evaluation of these programs.
Rogers: More could be done to flesh out the process in which incentives are implemented and evaluated. So the Pew Center on the states has been very active in encouraging states to actually evaluate their incentive programs in helping them to understand how to do this. Giving examples of other states that have done this and while these evaluations are far from the rigor that an academic paper would have, they’re a great starting point. And the reason they’re a great starting point is they put a dollar value on how much is spent on these programs. So when people are looking at state budgets, how much is spent on this, that or the other, they get a sense of just the value of the amount of tax dollars that are being either given up or spent on particular programs. And that’s a great starting point.
Grossmann: Jensen’s next line of work is to find out whether transparency matters in actual decisions.
Jensen: So one project that’s just ongoing is we’ve done these public records requests and we’ve found which companies challenged. So that was starting interesting point for us, but also what were they hiding? And we’re finding more of this across the country, where many of the companies that are making announcements about what they’re offering, that it really looks like a bait and switch, that they’re offering a large number of jobs and then giving much smaller amount of jobs.
We’re also doing some work on transparency, doing some research at the city level when these cities have been forced to reveal how much in tax incentives they’re giving, does that actually change behavior? Does transparency actually lead to better programs? And it really is an empirical question. We don’t know. And then I’m working on another project with people looking at the city level. Does focusing on these kind of whale hunting or buffalo hunting as people sometimes call it, going for the big fish, does that lead to a distortion in both money and time away from small business, away from workforce development? So, what is the real opportunity cost to spending so much time on these programs?
Grossmann: And Rogers is moving next to look at how special tax districts affect schools.
Rogers: We’re looking at the intersection of tax increment finance districts in school aid funding across states. So a lot of times these databases, the incentive databases don’t even talk about tax increment finance districts. But in some states, and some cities say like Chicago, these are really big deals that funnel a lot of money to economic development projects. So what we’re looking at is how the particular rules of how taxing jurisdictions are affected impacts the political economy parts of economic development incentives. So, Oklahoma is really weird and interesting and unique because school districts actually can get more state aid if they participate in a TIF district, than if they don’t, and that sets up really perverse incentives for districts to support economic development projects that they might not other otherwise support on their own grounds.
Grossmann: There’s a lot more to learn. The science of politics is available biweekly for the Niskanen Center and on iTunes. I’m your host, Matt Grossmann. Thanks to Nathan Jensen and Cynthia Rogers for joining me. Please check out the paper and the new book, Incentives to Pander, and then join us next time.