Nebraska's Latest Tax Incentives Report is an Exaggeration

July 17, 2014

On Tuesday, the Nebraska Department of Revenue released the state’s 2013 annual tax incentives report, which describes the various business tax incentives in the state as well as their effects and beneficiaries. The department reports that this year the state spent around $200 million on tax credits which generated nearly $1 billion of capital investment and 2,300 full-time jobs, mostly due to the Advantage Act and the Employment and Investment Growth Act. While these findings seem rosy, they should not be taken at face value but rather examined in lieu of alternative scenarios.

Investment and job creation numbers are some of the best trophies politicians can display to voters. Really, who can argue that the almost $3 billion in new investment and 4,379 new jobs created over the past two years by the largest active tax incentive program in Nebraska aren’t great figures? It turns out that the claim that the tax incentive created these investments and jobs is exaggerated due to selection bias—that is, many of the positive economic outcomes might have occurred in the absence of the incentives.

Robert Zahradnik of the Pew Center on the States suggested three questions policymakers should ask when evaluating the actual economic impact of tax incentive programs:

  1. To what extent did the incentive change businesses’ behavior?
  2. Will the incentive produce a net economic benefit?
  3. Is the tax incentive an effective approach to achieving its goals compared to alternative policies?

Although precise answers to these questions are difficult to obtain in the absence of formal economic models, qualitative reasons for investment and job growth in Nebraska are worth considering. Forbes ranks Nebraska as the 6th best state for business and careers, attributable to its favorable business costs, regulatory environment, and economic climate. Of course, tax incentives affect business costs, but they play a minimal role overall. Is it not reasonable to assume that businesses would invest in a state with favorable business costs, regulatory environment, and economic climate even without tax incentives? In deciding where to locate, businesses certainly consider the more imperative variables of labor markets, the economy, and physical site characteristics long before tax incentives.

Fiscal responsibility demands that before continuing to fund existing tax incentive programs, Nebraska policymakers should evaluate them. This could easily be done through cost-benefit and economic analyses by the Legislative Audit Office with the help of outside parties, it is just a matter of priorities.

Aside from other concerns about tax incentives, the policy of discriminatorily rewarding particular business behaviors doesn’t appear as attractive when compared with the alternative policy of lowering the state’s 18th highest top corporate tax rate. Eliminating the tax incentives would allow for a substantial decrease in the overall rate, offering real and sustained investment and job growth to the entire state—not just a few select firms.

More on Nebraska.

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