|Beggar Thy Neighbor: When States Compete|
|Written by Rebecca Adler|
|Tuesday, 17 April 2007|
State legislators wrestle with the cost/benefit of tax cuts and grant money to lure jobs to their states.
Texas, Illinois, North Carolina and Alabama. All are on a growing list of states offering incentives, from tax credits to grant money, to corporations in order to win their business. In return for these goodies, large corporations bring jobs and put money back into the economy.
But some states are beginning to wonder if the costs outweigh the benefits.
As part of an economic renewal package passed in 2005, Ohio legislators cut out the state's tangible personal property tax, inventory tax and corporate franchise tax, all of which had tax break options as an incentive to new businesses.
Instead, the legislature introduced a new commercial activities tax that would only tax goods sold in Ohio, benefiting manufacturers and non-retail industries, says Ohio House Speaker Jon Husted (R-Kettering).
"In large part we took ourselves out of the incentives race by reforming our tax code," Husted says. "But that doesn't mean people won't want to operate in our state. The tax reform, along with the tort reform in that same year, has significantly lowered the cost of doing business in our state."
North Carolina took a different approach to making sure their incentives didn't end up costing more than they were gaining from new corporations.
The state's job development investment program awards performance-based grants that come from income tax revenue rather than a separate budget item, says Deborah Barnes, a spokeswoman for the North Carolina Department of Commerce.
Companies can receive up to a 75% return on the income tax generated by their new employees, Barnes says. In this way, the companies receive no incentives until they create the jobs they have promised to the state.
"We can't come out negative on these deals," Barnes says. "If they don't come here our income tax revenue doesn't increase. If they do, we'll be getting 25% more than we would have gotten otherwise. So we both win."
But incentives aren't the only thing driving corporations to new states, Barnes says. A friendly business climate, nice weather and a good community can all bring businesses without ever needing to offer tax incentives.
Legislators in Texas have the same belief. That's why their incentive program, like North Carolina's, is only offered to those companies that require a tie-breaker between two states.
The Texas Enterprise Fund is used to quickly close deals with new companies. But unlike the North Carolina grants program, it comes from the general fund, with $295 million to be used for business incentives, says Katherine Cesinger, a spokeswoman for Texas Governor Rick Perry.
To date $181 million has been spent from the fund, with an expected return of $2.2 billion, which the governor believes shows how well the fund is working.
"Ideally states shouldn't need incentives," Cesinger says. "But realistically we needed something to set us apart from the other states and countries that are also competing for these employers and jobs."