It’s like signing a blank check
Sept. 26, 2012 — In the early 1990’s, while Robert Lynch was teaching economics at the State University of New York at Cortlandt, he became interested in one of the state’s most-touted economic development programs, known as Industrial Development Agencies (IDAs). In 1969, New York state lawmakers had allowed local governments to set up these kinds of agencies, which functioned as quasi-governmental corporations with the responsibility of attracting and retaining business investment and the power to give incentives — such as free land, low-cost financing, and exemption from state and local taxes — to accomplish that result.
HOW CAN WE KNOW WHAT WORKS?
This is the second in a series of articles examining the widespread phenomenon of states and localities providing incentives — that is, subsidizing — to private businesses in the United States. These subsidies, in the words of one private consultant, have become so prevalent as to be “a normal part of business” and “an expected part of every location decision.”
The first article in this series can be found here.
“They were issuing these press releases where they claimed that the IDAs were remarkably successful,” Lynch said recently. “They claimed that they had created hundreds of thousands of jobs and cost local governments almost nothing.”
It was widely reported at the time that the IDAs had created 270,000 jobs between 1970 and 1991, at very little cost to taxpayers. “I thought, ‘If that’s true, then this is a great success story,’ and I wanted to document it,” Lynch said.
When he began to investigate those claims, however, Lynch found that reliable data was hard to come by. There were few rules governing what IDAs were required to report to state and local officials. In the reports that were filed, Lynch quickly found discrepancies: “They were claiming that a certain company had created 200 jobs,” he said, “but when I looked into it, that company only had 100 employees.”
Lynch spent the next four years collecting data from individual firms, the IDAs themselves, and various state and local agencies. When he published his results in 1992, they came as a shock to many lawmakers. Lynch found that, rather than being nearly cost-free, IDAs had cost taxpayers about $1.4 billion between 1987 and 1991 alone (about $2.8 billion in today’s dollars).
Where officials had claimed that the incentives offered by IDAs had lured hundreds of firms to New York from other states and abroad, Lynch found a grand total of 23 relocated firms, only two of which said that the incentives had played a part in their decision to move. And as for the 2,700 jobs those firms were said to have created, Lynch found that the IDAs had created no more than one third of that number, and probably far fewer.
“I was disappointed, to say the least,” Lynch said. “This was not the success story it had been promoted as.”
The program, which still exists, was reformed following Lynch’s study to restrict the types of incentives that IDAs can offer and to make some modest improvements in transparency requirements. But there are still problems with disclosure, and the program remains the object of much criticism, coming even from state officials charged with overseeing it. A report this year from the office of New York State Comptroller Thomas DiNapoli, for example, found several instances where IDAs had misused funds or misreported data, and recommended legislative changes to increase transparency and accountability.
“Essentially the same as writing checks”
The IDA program in New York is just one of countless programs across the United States through which states grant various kinds of incentives — such as tax credits, grants, low-cost loans, and free property — to businesses with the goal of encouraging economic development. Most states and numerous localities have several ongoing programs, and also offer one-time, company-specific incentive packages to some businesses. Kenneth Thomas, a political scientist at the University of Missouri-St. Louis has estimated, conservatively, that the total value of economic development incentives in 2010 was $70 billion.
Despite the high cost, basic facts about many of the programs remain opaque: “We are talking about billions of dollars of taxpayer money every year, and the workings of a lot of these programs are about as clear as mud,” said Philip Mattera, the research director for the D.C. organization Good Jobs First, which advocates for increased transparency in economic development incentives. While an increasing number of states have begun posting some information on their incentive programs online, Mattera said that such information is often unreliable or incomplete, and many programs simply “fly completely under the radar.” (See bottom box on state-level disclosure on the next page.)
“If you found out that one of your elected officials had written a bunch of checks to some companies out of the general fund, you would want to know which ones, how much they got paid, and what you as a citizen got out of it,” Mattera said. “Many of these subsidy programs are essentially the same as writing checks.” (See bottom box, below.)
Call it what you will, it costs the taxpayers money
Only a fraction of the money that is spent on incentives for businesses constitutes what is described as “direct spending” in which states and local governments transfer assets directly to companies, usually in the form of monetary grants or land.
A larger portion of the total is made up of “indirect spending,” through which states and localities reduce what would otherwise have been the companies’ tax liability. Most commonly this is acheived by offering the companies a tax credit.
Part of the reason that business subsidies are so opaque is because, while direct spending is reflected in the budget of a state or local government, indirect spending often is not.
Several economists noted that indirect spending has exactly the same impact on state and local budgets as direct spending: they point out that, in both cases, money that would have otherwise been used for public functions is lost to public use.