New Jersey

Perhaps lawmakers are beginning to realize that an economic policy based on tax incentives is especially prone to political favoritism. From The Express-Times:

Wary of losing revenue, city council members Tuesday put the brakes on plans to apply tax incentives to new properties.

Councilman Joseph Leeson Jr. said before he votes to OK changes to the 20-year-old LERTA program, he wants to see an analysis of how much investment the incentives have spurred compared to the tax dollars lost.

LERTA stands for Local Economic Revitalization Tax Assistance and applies only to commercial and industrial property.

Leeson also asked for the names of property owners who would benefit from 10 proposed LERTA boundary changes. He and council President J. Michael Schweder voiced concern the changes were tailored to benefit certain people. A committee of business representatives recommended the new boundaries.

The problem is that rather than correct the situation by offering everyone a low tax rate that incentivizes investment, bureaucrats will resort back to uniform but high tax scheme. See "[w]ary of losing tax revenue . . . ."

Michigan

More problems from Up North. From WLNS.com:

Things are looking a little brighter in the capitol city these days. In May, biotech firm Neogen added 40 new jobs to the area. Just last month, a developer broke ground on a 13 million dollar mixed-use facility, and a state tax credit paved the way for a Lansing automotive supplier to add 300 new jobs.

Todd Cook, V.P. of Lansing Chamber of Commerce: "I think you are seeing some momentum happening, there's things going on."

But some say there is a proposal right now at City Hall that could stop some of the momentum right in its tracks. City council may force companies that get tax abatements to pay a prevailing wage. The proposal would ensure those companies pay better wages, benefits and hire Lansing residents, all of which Council Vice President Brian Jeffers says has been a problem recently.

Brian Jeffers: "Right now we have issues with developers hiring contractors outside of our region."

This should not be all that surprising. If government officials have the power to award discretionary tax breaks, any other scheme that increases the value of this power will be icing on the cake.

Kentucky

From Business First of Louisville:

State and local economic development officials have made their pitch to land a major corporate headquarters for Louisville.

Now, they'll play the waiting game to see whether their efforts result in a home run.

The Kentucky Economic Development Finance Authority granted Kindred Pharmacy Services Inc. preliminary approval for $8 million in state tax incentives for up to 10 years at its Oct. 26 meeting in Frankfort.

When you think about it, it is mindboggling to consider all the time, money and other resources used to attract a company via tax incentives, simply because the government decided to make it financially unwise to relocate in an area in the first place.

Michigan

Economic favoritism is rampant in the state "up north." From the Lansing State Journal:

Demmer Corp. was awarded more than $2 million in local and state government aid Tuesday to use an empty factory to build components for the military.

Lansing-based Demmer will add 300 jobs and spend $12 million to upgrade buildings at 1600 N. Larch and 736 McKinley for its operation.

It will receive a $919,500 in local and state tax capture to improve the properties. In addition, Demmer was awarded business tax breaks of $667,000 and $360,000 to redevelop the two brownfield sites.

Demmer's plan was among 14 projects across the state awarded tax credits by the Michigan Economic Growth Authority to add jobs or redevelop properties. The projects together are estimated to add about 5,000 jobs directly and nearly 3,000 from the spinoff economic effect.

Gov. Jennifer Granholm, who faces a re-election challenge by Republican Dick DeVos, said the announcements are proof that Michigan is starting to grow and diversify its economy. She likened the state to the Detroit Tigers, which is headied to the World Series after being one of the worst teams in baseball.

"I think that's a good metaphor," she said.

New York

From the Buffalo News, a dispute involving a possible tax break:

The [Somerset] Town Board strongly opposes any property tax breaks for AES Corp., which is locked in a tax dispute with the town on its existing power plant and has made a pitch to build a second coal-fired power plant in Niagara County if it gets tax breaks.

A news release issued over the weekend asserts that tax breaks the company is seeking from the Niagara County Industrial Development Agency would "result in fiscal havoc and financial disaster for all of Niagara County."

But if the new plant is built, IDA Chairman Henry M. Sloma and AES President Kevin R. Pierce said, the town, the Barker Central School District and the county would receive more money from AES than they do now.

"When you bring on the second plant, everybody's numbers jump dramatically. That's the piece they're missing," Sloma said.

Michigan

Today's Wall Street Journal has an article on Michigan's gubernatorial race and the tax incentive-happy incumbent, Jennifer Granholm. An excerpt:

She is offering tax incentives and cash loans in return for promises -- which critics describe as vague -- to preserve or create jobs. In April Ms. Granholm gave General Motors Corp. $40 million in tax breaks for a pair of factory retoolings. Last month she attended the ribbon-cutting of a drivetrain plant in Flint, which the company rehabbed in return for $28.2 million in state tax breaks. In August Ms. Granholm offered Ford Motor Co. $151 million for investments she claimed would retain more than 50,000 Michigan jobs.

As economic policy, the value of Ms. Granholm's corporate largess is questionable. The state aid is minuscule compared with losses the auto makers face. GM says the breaks are unlikely to swell its payroll. And even with the $151 million on offer, Ford appears bent on reducing its global work force by 40% within three years -- a move Ms. Granholm's critics say could wipe out 7,000 Michigan jobs.

"A good announcement here, a good announcement there; the fact is that government handouts don't create jobs," state Republican Party Chairman Saul Anuzis says.

The Idea Shop

One of the strongest and most concise criticisms of state tax incentives comes from Andrew Chamberlain's blog, The Idea Shop.

Not surprisingly, I think they’re lousy policy. Location-based tax incentives are defended on grounds that they boost employment and spur economic activity. But that’s an empirical question—and one that requires careful economic study. The problem is that location-based incentives are almost never accompanied by the requisite scientific review. And because the costs and benefits aren’t estimated and studied—either before or after implementation—tax incentives commonly end up channeling taxpayer dollars directly into the pockets of rent-seeking film companies, generating no corresponding economic benefits on a net basis.

Ultimately, the main beneficiaries are not taxpayers but lawmakers. Every incentive package that attracts a rent-seeking company allows lawmakers to make public announcements taking credit for “new jobs.” Location-based incentives can be thought of as a market transaction between lawmakers and film companies. Lawmakers purchase favorable media coverage for themselves, film companies accept payment for filming in economically unprofitable places, and taxpayers finance the deal.

When viewed this way, it no surprise some have called location-based incentives “self-imposed rape” by state and local lawmakers.

Connecticut

From the Orange Bulletin:

First Selectwoman Derrylyn Gorski and the Board of Selectmen in a unanimous vote have proposed a plan of tax incentives for area businesses.

Gorski said the BOS approved the proposal at its Sept. 25 meeting.

While Gorski said most towns have some form of a tax-incentive program to encourage businesses to expand Bethany needs to offer comparative incentives to encourage business to look at Bethany as a business-oriented community.

If the goal is to "encourage business to look at ______ as a business-oriented community," why is the answer always an incentive program instead of a lower and more simple tax regime?

TaxProf Blog

TaxProf links to Brannon P. Denning's paper on state investment incentives in light of DaimlerChrysler v. Cuno.

Tax Policy Blog

The Tax Foundation's Tax Policy Blog has two recent posts relevant to state tax breaks and incentives.

First, Andrew Chamberlain introduces the Tax Foundation's 2007 State Business Tax Climate Index. He points to the highlighting of simplicity in tax regimes:

It is commonly argued that more economically developed states like New Jersey and New York have slower growth rates because their economic indicators, such as population and median income, are so much higher than those of developing states. Texas, however, debunks the myth that economically developed states do not have room to grow.

One of the largest states in the union in both population and output, Texas comes in seventh in population growth, 11th in output growth, and 17th in increasing personal income. While its big-state brethren lag far behind, Texas remains near the top by embracing favorable conditions for businesses such as the absence of a state income tax.

Size is no excuse. State tax systems that are simple, fair, broad-based and low-rate can experience significant growth regardless of size or level of economic development.

Second, Curtis S. Dubay also discusses the 2007 SBTCI and points out that "[t]ax incentives- whether in the form of targeted tax incentives to specific companies, or special credits or exemptions- are bad tax policy and an ineffective form of economic development. " Dubay's post concludes that

Lawmakers can go to their respective state houses tomorrow, improve the competitiveness of their state’s business tax climate and instantly help businesses in their state and possibly attract new companies. While global competition remains a concern for all states, most business relocations occur between states. So lawmakers need to be keenly aware of where their state’s competitiveness ranks.

The top ten states in the 2007 SBTCI are as follows:

1. Wyoming
2. South Dakota
3. Alaska
4. Nevada
5. Florida
6. Texas
7. New Hampshire
8. Montana
9. Delaware
10. Oregon

The bottom ten states are:

50. Rhode Island
49. Ohio
48. New Jersey
47. New York
46. Vermont
45. California
44. Nebraska
43. Iowa
42. Maine
41. Minnesota

Obviously, Ohio's tax scheme is a major hindrance to economic growth. While the Tax Policy Blog has said that "this year Ohio residents also have a hotly contested gubernatorial race that is catching headlines in the tax policy world," I doubt whether either of the major party candidates for governor will explicitly criticize the Buckeye State's tax incentive approach to development.

Illinois

A quick article from today's Daily Southtown:

Bloom Township officials last week approved a Chicago Heights industrial company's tax abatement request that is expected to have little impact on township revenues.

The abatement for Vesuvius USA, a refractory supplier, will be minimal because the township's portion of the company's tax bill is less than 1 percent, Supervisor Thomas "TJ" Somer said.

The board approved a tax abatement of 60 percent for five years and a 30 percent abatement for the next five years.

The tax rebate applies to any tax dollars paid over its current rate based on improvements made to the site.

According to information from the township, Vesuvius paid about $111,000 in property taxes in 2005. Of that bill, the township received about $250.

Somer said the company is seeking to improve its production components, not its property or facility, so it likely will not see a large tax rate increase result.

"I don't think its (the abatement) is going to affect us at all," he said.

The board Tuesday considered a 100 percent and a 50 percent abatement for the company but decided to reduce the figure at the suggestion of Trustee Robert Rossi.

"This way we're helping them out, but we're telling homeowners we're not giving the house away," he said.

Trustee Theresa Brink said she was "not quite sure" about reducing the percentage and voted against the reduced rate.

"I would hate to lose any business for Bloom Township residents," she said.

Vesuvius is located at 333 State St.

1) It's good know that, in considering $250 in revenue, Rossi wants to make sure that he is not "giving the house away."

2) Can you imagine paying $111,000 in property taxes?

Oregon

If your parent company has pled guilty to criminal price fixing, should you as a subsidiary still be able to receive local tax breaks?

That is the question that faces officials in Oregon. From the Eugene Register-Guard:

[Attorney Bern] Johnson said he was glad to hear the state is trying to recover money for Oregonians who were harmed by price fixing. But he questions whether Hynix should still be getting tax breaks, including those for the latest upgrade, if corporate officials have broken the law.

"It would be too bad if with one hand the state is giving this company tax breaks, and with the other hand, the state has to be suing the company to recover on behalf of consumers who were harmed by illegal activity," he said.

"It seems that if a company is doing illegal activity that is harming people in Oregon, the state of Oregon shouldn't be giving that company tax breaks."

. . .

Eugene city councilor David Kelly said he thinks the council will want to know whether the price fixing offenses affect Hynix's tax waiver, and if Hynix in Eugene was strongly connected with the price fixing.

"The amount of tax that Eugene is forgoing is significant," Kelly said, "so I think the council would have an interest in getting answers to these questions."

That said, he added that "after a rough start-up (Hynix has) been a very good corporate citizen. So I'm not thinking of Hynix in Eugene as a bad guy in any way."

Pat Eagan, the governor's chief of staff, said that the underlying criminal behavior - the price fixing - didn't happen anywhere near Oregon.

Hynix officials "have agreed that behavior that was criminal and fit the definition of antitrust occurred," Eagan said. "They've gotten rid of those individuals, and our understanding is there's not more of that behavior going on."

The governor's June trade mission to South Korea had a duty to meet with Hynix officials in Seoul because Hynix is a large regional employer in Oregon and the company had been hinting at expansion, Eagan said. Hynix employs 1,150 workers in Eugene.

"If we had shunned them for something they had already agreed had happened and was four years old, I'm not sure that that would be wise behavior on our part, and I'm not sure that anyone would argue that that's what we ought to do," Eagan said.

Eagan is probably right that it would not be wise to kick a dog while it's down. But it would have been even wiser if Oregon officials did not have to incentivize Hynix to locate in Eugene. Had there been a low and uniform rate instead of the company receiving $50 million in property tax breaks, the issue would be moot and lawmakers could consider more important items.

Georgia

I will be out of town until Monday. Before I go, however, I'll leave you with this, from GlobeSt.com:

The total economic incentives package Georgia offered Kia Motors came to $410 million or about $164,000 per job creation, according to the Georgia Department of Economic Development, as GlobeSt.com previously reported. The package includes $75.9 million in job tax credits over five years; $20.2 million for a job training center on the site; and $60.5 million to purchase and prepare the site. West Point and Troup County are offered up to $130 million in property tax abatements over 15 years.

more Michigan

This is a sort of follow-up from the below post. From the Grand Rapids Press:

Siemens collected $1.5 million in tax breaks and grants for choosing to grow in Holland Township instead of a competing site in Georgia.

The biggest chunk will come from the MEDC, which approved a $1.1 million Single Business Tax credit over nine years and a $40,000 job-training grant.

Holland Township is expected to approve a $327,000 tax abatement over 12 years for the investment, Supervisor Terry Nienhuis said.

Michigan

Jim Barrett, president and CEO of the Michigan Chamber of Commerce, has some sensible ideas regarding how to address Michigan's dire economic situation. From the Kalamazoo Gazette:

"We need to get beyond being totally dependent on auto-related jobs and thinking,'' he said.

Economic recovery should be aided by the repeal of the Single Business Tax, effective at the end of 2007, he said.

"The argument is that taxes aren't making much difference in business investment,'' he said. "I would ask why are there so many incentives and why are they used so broadly by the Michigan Economic Development Corp. and local units of government? We need to think of the entire business community, most of which never qualify for tax and incentive programs."

Don't expect a response from the Michigan Economic Development Corporation anytime soon.

Georgia

From the Macon Telegraph:

Macon Chips Inc., a local wood mill, is planning a $40-million expansion and wants to add about 15 workers, according to information provided during Monday's Macon-Bibb County Industrial Authority meeting.

In an effort to encourage the company to expand in Macon, the authority agreed to offer a more than $3.5 million tax incentive.

"The total value of this (tax abatement schedule) over 15 years to this company is $3.781 million," said Kevin Brown, the authority's attorney. "But (the company) will have a significant inflow to the government entities for over $2.2 million in revenue that otherwise would not be received."

Of note,

Authority member Charlie Bishop, who also is chairman of the Bibb County Commission, said that while he voted in favor of the tax abatement schedule at the authority meeting, "it doesn't mean I will vote the same way" at the County Commission meeting.

"At the same time, I want to say we value our existing industries as much, if not more, as we do new industries," Bishop said.

Kentucky

From the Lexington Herald-Leader:

Two University of Kentucky researchers will produce a study by year's end that tries to measure the effectiveness of Kentucky's expensive job-creation programs.

The $75,000 report, commissioned this year by the Cabinet for Economic Development's board of directors, will come one year after the Lexington Herald-Leader ran a series of articles scrutinizing the Cabinet's business incentive programs. The Cabinet has spent more than $1.2 billion recruiting jobs over the past 25 years.

The newspaper found that the Cabinet has done little to gauge the effectiveness of its incentives, is more secretive than counterparts in many other states and sometimes loosely monitors its programs.

"We are confident that the study will find that the current programs are effective in attracting new business, and in retaining and expanding existing business," Cabinet for Economic Development Secretary Gene Strong said Friday in a written statement. "However, it is important to routinely evaluate the economic development tools in our toolbox and to stay on the cutting edge by making changes if there are better ways to achieve our goals."

As long staying on the cutting edge means maintaining a monopoly on the granting of state tax breaks and incentives, I'm sure Mr. Strong will be satisfied with the findings of its funded report.

don't call it a comeback

I anticipated having plenty of time to devote to this blog during this final year of law school. Alas, things have not progressed as planned, as I underestimated the efforts it would take to find a job and to effectively serve as president of a student group. Not to mention that I am by no means planning to slack off in any of my course work.

That being said, this blog has been neglected I am not going to let it die. Up to now the majority of this forum has used to discuss news blurbs concerning state tax breaks and incentives and policy ramifications. I am going to keep to that format, but I will also look more closely at the legal background of tax breaks. I will do this by looking at case law that I come across and scholarly articles. By no means, however, will I be able to cover everything I should or want to.

I just took at look at an article published last winter by the Georgetown Journal of Law & Public Policy. The article was published in conjunction with a symposium they held entitled "DaimlerChrysler v. Cuno and the Constitutionality of State Tax Incentives for Economic Development." The title of UCLA law professor Kirk J. Stark's and Federal Reserve Bank of San Francisco economist Daniel J. Wilson's article was "What Do We Know About the Interstate Economic Effects?" (available at 4 Geo. J.L. & Pub. Pol'y 133).

The authors show that while there has been quite a bit of economic research on the intrastate effects of state tax breaks and incentives, little has been done on the interstate effects. For instance, the economic studies reviewed by the authors "say nothing about either the out-of-state or nationwide effects of any one state's investment tax incentives." The authors cite only one study that lends "support for the view that a state's adoption of R&D tax credits has adverse practical effects on the level of R&D undertaken within other states."

In short, as to the question posed in the title of their article, Stark and Wilson conclude that "research in this are rarely provides unqualified guidance regardin the economic effects of state incentive programs. . . . [E]ven the most sophisticated econometric studies should be interpreted with caution. Incomplete data, contestable assumptions, and other limitations of econometric modeling limit our ability to derive strong conclusions from existing research."

According to the authors, this conclusion is important because the Supreme Court "may be looking for concerete empircal verification of the interstate economic effects of state laws challenged under the dormant Commerce Clause. Indeed, the general trend in the Court's dorman Commerce Clause jurisprudence seems to be in the direction of taking account of the practical economic effects of challenged state laws in order to determine their constitutionality." The idea of "concrete empiral verification" is taken from the recent Supreme Court case of American Trucking Associations, Inc. v. Michigan Public Service Commission, 125 S. Ct. 2419, (2005), which reviewed a $100 fee imposed by the Michigan state government on "vehicles that engage in intrastate commercial operations." Stark and Wilson find it important that the Court discussed "the importance of evaluating the practical economic effect of the challenged law. For example, the Court observed that 'the record contains little, if any, evidence that the $100 fee imposes any significant practical burden upon interstate trade.'" (emphasis added by Stark and Wilson).

And so, in spite of the dearth of research on the interstate effects on state tax breaks and incentivces,

the Supreme Court's increased emphasis on "practical economic effects" in its dormant Commerce Clause jurisprudence brings econometric research to the center of constitutional analysis. This gulf between what is knowable and what the Court wants to know raises concerns of institutional competence, calling into question the Court's role as the chief protector of the "free trade zone" among the several states. We offer no solutions to this dilemma here; however, we emphasize that judicial caution should not necessarily translate into a reluctance to declare state tax incentives unconstitutional. Striking down state laws may appear to be the more activist course, yet letting them stand is an equally consequential decision.

Overall, the article presents a nice consideration of the above issues as well as a summary of Supreme Court dormant commerce clause jurisprudence. The articles thoughts were really never put into play, as the Supreme Court decided Cuno on a standing techicality.

However, there is one troubling aspect of the article, which comes at its conclusion. The authors suggest that "[p]erhaps the best outcome for the Cuno controversy would be a decision that prompts Congress to undertake a careful and thorough evaluation of the nationwide effects of state tax incentives." This is a bad idea, as Congress is reasonbly competent at few things, let alone at engaging in a "careful and thorough" economic evaluation. Economic expertise is lacking in Congress, but partiality is not. Rather than reviewing the effects of state tax breaks from the perspective of a whole nation, those in Congress would find data that would support their constituents' view on the subject.