Economic Development or Economic Divertissement?

June 6, 2012

Under a new transparency bill heading to Governor Quinn’s desk, local governments in Illinois will have to report special sales tax abatements designed to lure businesses, along with names of the business recipients and the consultants who helped secure the deals. State and local governments around the country offer special deals like this around the country, and they exist as sales, property, and income tax abatements to businesses to locate within their jurisdictions.

The way these deals normally work is that (usually large) businesses will shop around for potential locations for new plants or offices and then locate depending on which area gives them the best rebate. Alternatively, companies choose a location they really want, and then pit states’ offers against each other to secure better tax incentives in their desired location.

The announced move of defense contractor Northrop Grumman to the DC area in 2010 created a firestorm of tax competition between DC, Maryland, and Virginia. It is impossible to tell whether their ultimate move to Northern Virginia (in proximity to the Pentagon) was a foregone conclusion before they started the incentives war. States like New Jersey have done the reverse – attracting businesses just a few miles outside their border with multi-million dollar tax deals.

The sales tax abatement transparency bill in Illinois is in response to a couple of local governments providing lower rates to businesses to relocate a few miles to their areas to avoid paying (higher) taxes in Chicago, particularly to the transportation authority. But the bill highlights a larger problem with using temporary or special tax incentives to pilfer businesses from nearby areas. This bill, which provides more transparency to these special deals, is a step forward and an idea that I hope the state considers for its own deals. That’s because just last year the state approved special tax deals to keep Sears and the Chicago Mercantile Exchange in the state after increasing their corporate income tax rates from 7.3 to 9.5%. What is good for the goose is good for gander, as the saying goes.

Defenders of these provisions argue that they are justified in the name of economic development. But when we read “economic development,” particularly at the state and local level, what does it really mean? As far as I have been able to decipher from economic development office press releases, it could mean one of three things, (by decreasing order of frequency):

      1. Attracting business from abroad (usually other localities or states) with special deals, temporary tax cuts, or preferential rates.
      2. Attracting businesses from abroad with lower statutory tax rates and lower compliance costs.
      3. Growing businesses that already exist.

Deals in category one might be more accurately called “economic divertissement,” because that is what these deals really are. These deals divert attention from the fact that they may end up costing the government more tax dollars than they bring in, that mechanisms to recover money from businesses who do not deliver on their development promises tend not to work, and that these deals are paid for by existing businesses who did not need a special tax deal to locate in your state in the first place.

Deals in category one divert from the fact that if you are the state of Illinois watching their local governments, these deals look unjustifiable because you are merely taking jobs from other local areas. If you are not a resident of Illinois, Illinois’ deals seem equally unjustifiable because they are merely taking jobs from your state.

So why is the economic development option number one so attractive? Because real economic development is hard, and rarely gets a press release into the headlines. It is very difficult, if not impossible, to measure how many jobs a decent tax code creates, and even harder to measure the impact of developing small businesses capacity, or helping them access capital. But these gains are real, and are gains from businesses that will not leave your state once the illusory tax deal expires.

See more of our coverage on tax incentives here, economic development transparency bills here, and oversight of state tax incentives legislation here.

More on Illinois here.


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