From The New York Times: "As Companies Seek Tax Deals, Governments Pay High Price"

The 48 companies that have received at least $100 million, per the NYT,
General Motors received at least $1.77 billion in state/local incentives

In The New York Times today (Sunday -- saw it on line early) a superlative article reviews the extraordinary amounts that state and local governments give to huge corporations in the attempt to lure or keep them in the locale and create jobs and business:

A Times investigation has examined and tallied thousands of local incentives granted nationwide and has found that states, counties and cities are giving up more than $80 billion each year to companies. The beneficiaries come from virtually every corner of the corporate world, encompassing oil and coal conglomerates, technology and entertainment companies, banks and big-box retail chains.

The cost of the awards is certainly far higher. A full accounting, The Times discovered, is not possible because the incentives are granted by thousands of government agencies and officials, and many do not know the value of all their awards. Nor do they know if the money was worth it because they rarely track how many jobs are created. Even where officials do track incentives, they acknowledge that it is impossible to know whether the jobs would have been created without the aid.

“How can you even talk about rationalizing what you’re doing when you don’t even know what you’re doing?” said Timothy J. Bartik, a senior economist at the W.E. Upjohn Institute for Employment Research in Kalamazoo, Mich.

The article is supported by excellent interactive graphics of the data (a hallmark of the NYT),which can be found here.

Proponents of incentives to lure business assert that it will raise, not reduce, tax revenues in the long run. That is because businesses pay corporate income tax (see my post on the manipulation of that between states here), property tax, and sales taxes for things they buy in-state, and they hire employees who pay personal income and withholding taxes, property taxes, and sales taxes, among other things. The incentives, though, usually come in the form of exemption from taxation to the incoming corporation for a certain period or amount, which means that whatever benefit comes from taxes during that period is likely coming from the taxes paid by their workers, not the corporation.

There may be situations, in fact, where such incentives are warranted; those are situations where bringing in the new business is the most effective way to address unemployment and/or raise revenue. But such a deal would have to be carefully constructed. Incentive deals are often driven by political expediency, and the studies that they always engender -- and they always have some sort of self serving study supposedly supporting them -- are usually driven by the foregone conclusion of supporting the project. Careful independent studies are needed with well constructed, well founded criteria, not criteria that evolve with the changing dictates of the desired conclusions.

At the heart of the NYT article is a discussion of the fact that the state and local governments typically do not know (and, indeed, cannot know) whether the incentives will pay off and, sometimes, even how much they will cost. And that is just the upfront dollars. While businesses relocating to an area may have large costs in property, start up and training, and so on, the state and local governments also have huge burdens in constructing infrastructure for roads, water, schools, police and fire protection, utility service, as well as potential environmental costs.

Nonetheless, politicians have enormous pressure on them to bring in such businesses. It allows them to claim they are "creating jobs," reducing unemployment, and improving their states economies. I think it's doubtful, though, that incentives are the best way to do this. If it is appropriate for governments to invest in business, then in many cases the best bang for the buck might be to actually invest in businesses, or operate them, not to give the money away.