I’ve started yet another project on the costs of offering subsidies to individual firms. These economic development incentives are especially common in the United States where states and cities often compete with each other over firms.
One part of the project is compiling incentives data contained in a database called Incentive Monitor, which is one of the most comprehensive databases of incentives. There are other incentive databases, including Good Jobs First Subsidy Tracker.
Using the Incentive Monitor database we can get a snapshot of the use of incentives in the United States. In the year 2014 alone I can identify over 2,000 individual economic development incentives at an aggregate cost of $10 billion, although this largely ignores many of the local economic development incentives such as tax incremental financing. The incentives in this data base are credited with creating a total of just under 309,000 jobs, or just over $32,000 per job.
These aggregate numbers can be misleading, where the over 2,000 economic development programs are each associated with fiscal costs and job creation numbers. In some cases these incentives are associated with projects that create zero jobs, either these are associated with other goals, such as promoting renewable energy, or in “safeguarding” jobs from being poached by other cities, states, or countries.
By removing the incentives that have no state job creation numbers, the average amount of incentives per project remains at over $31,500. Whether you think this is a big or small number is up to you. What I found interesting is the dramatic differences in the cost of incentives per job by state.
Some states provide either provide no incentives or the number of observations are so small we don’t want to draw inferences. But for the states that offered at least ten incentives in 2014, there is a clear pattern.
First, a number of states provide incentives, but at a substantially lower cost per job than the national average. A large cluster of states offer incentives at cost per job in the teens. What do states like Florida ($10,000 per job), Indiana ($12,000), Maryland ($18.521) and Mississippi ($19,136) have in common?
The Pew Charitable Trusts has been active in helping states reform their economic development programs. They have identified states that have reformed their programs from 2012 to 2014, and five of these states are in our data set. Which states reformed their incentive programs? Florida, Indiana, Maryland, and Mississippi along with Louisiana. We’ll get to Louisiana in soon.
These states that have enacted reforms aren’t the only states with less costly incentive programs, and this description doesn’t make a causal claim that these reforms have reduced the costs of these programs. But there is clearly a cluster of reformer states that have much less costly incentive programs.
Second there are a number of states such as Connecticut that were consistently above the average. Investors in Connecticut were offer 87 incentives at an average cost per job of $59,000. This average is driven up by two massive incentives to United Technologies and Praxair. But of the 87 incentives, 52 were above the national average in terms of costs per job.
Louisiana, one of the states that enacted reforms of their incentive programs, was very active in offering incentives (125 incentives in 2014) and at a cost of $58,083 per job. Iowa performed better but was still above the national average (58 incentives at a cost of $42,000 per job). Illinois provided 31 incentives at a cost of $63,000 per job.
Making relative comparison of these programs is difficult given the different goals of the programs and the additional incentive programs in states that may not be captured in this data. For example, the many tax increment financing districts in Illinois are not included in this data, which could potentially increase or decrease the cost per job averages.
The point is that there are three clusters. Low cost per job, high cost per job and New Jersey.
New Jersey offered 86 incentives at an average cost of over $238,500 per job. That can’t be correct. Let me double check.
It is correct. New Jersey has clearly offered some massive incentives that created very few jobs. For example, the highly criticized $82 million incentive to attract the Philadelphia 76ers practice facility is credited with 250 jobs ($328,000 per job). This helps us get to the $238,500 per job estimate.
But offering incentives at a whopping per job cost isn’t an outlier in New Jersey. It seems to be their economic development strategy.
If we rank all 2,000 plus incentives on a cost per job basis, six of the most expensive (per job) incentives are in New Jersey. This includes the high profile Subaru incentive to attract the company to Camden, New Jersey. Of the top 50 most expensive incentives per job deals, here is the state distribution.
Nineteen of the fifty most expensive incentives were New Jersey incentives.
What is happening in New Jersey?
Interestingly, economic development incentives are under fire in New Jersey, but probably not for the reason that you have expected. The state has under funded their economic development budget and the state owns companies their incentive checks. $785 million in checks.
The main reason is that these incentives, unlike many of the tax credits in other states, require a budget allocation. For example, in most other states an economic development agency can be authorized by the legislature to allocate tax credits, lowering the firm’s future tax bill.
In New Jersey, firms pay their taxes, but are issued a rebate from the state coffers. What is the difference? The difference is that the state needs to have the money in an economic development fund to provide the rebate to firms. But with the budget crisis in New Jersey these programs have been underfunded and thus the rebate checks haven’t been sent out.
I wish I had some clever conclusions on what is happening in New Jersey. Something very, very different is going on in New Jersey. And that isn’t a compliment.