Some States Cut Business Tax Exemptions and Credits as Policymakers Try to Balance Budgets

June 27, 2011

States are reevaluating the tax incentives given to businesses. Offered as inducements to hire more workers or operate in certain areas, economic development incentives represent sizeable tax breaks. In 2010, the value of these incentives was estimated to top $70 billion.

Though the economic literature is skeptical about the effectiveness of these incentives, states have been ratcheting up their offerings to be more appealing than their neighbors.

Economists Johnson and Stallmann characterize economic development incentives as such:

Giving incentives is like standing up at a football game. If one person stands to see better, it blocks the view of several behind, so they stand and this causes additional standing. In the end, everyone is standing and no one’s view of the game is improved… As long as the majority of states are competing by giving incentives then other states will likely be left out if they do not.

However, facing budget shortfalls, some states are cutting incentives as a way to fill in the gaps. Last week, legislators in Hawaii enacted a law removing tax exemptions for businesses. By doing so, Hawaii hopes to save $200 million a year.

New Jersey could follow suit. Earlier in the year, Governor Chris Christie ordered a report studying the costs and benefits of New Jersey’s Urban Enterprise Zone Program. The Urban Enterprise Zone Program is an incentive program given for conducting business in certain New Jersey commercial areas. The report, written by an independent consultant, finds New Jersey can save $100 million a year by scuttling the program that “delivered a limited economic impact… [and] produced a negative return on State investment.”

Though legislators have yet to decide whether or not to cancel the program, the report’s conclusions have the support of Lori Grifa, the Commissioner of New Jersey Department of Community Affairs, and Caren Franzini, CEO of New Jersey Economic Development Authority. Both are ranking members of the New Jersey Urban Enterprise Zone Authority.

Furthermore, some businesses which claimed these tax breaks have failed to deliver. In Massachusetts, New Mexico, and Ohio officials are working to reclaim taxes waived under these incentive programs through “claw-back” provisions which allow the state to demand repayment when businesses fail to meet the requirements.

Mark Montigny (D) of the Massachusetts Senate is specifically going after Fidelity Investments and Evergreen Solar, two businesses operating in Massachusetts which took advantage of the tax incentives but are now cutting jobs. Currently, Fidelity Investments is moving over 1,000 employees out of Massachusetts and primarily into Rhode Island and New Jersey. Similarly, Evergreen Solar is closing down its Massachusetts operation and laying off over 800 employees.

According to Montigny “[This is] just another example of a private company fleecing the Commonwealth at the taxpayer’s expense.” Montigny hopes to reclaim more than $21 million (subscription required) from Evergreen Solar alone, but the company claims it fulfilled its obligations.

While the use of tax incentives is not over, as states look for new ways to meet budgetary requirements, businesses may find far fewer of these carrots in the future.

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