Study: Tax credit costs $1.2M a job

2/6/2017

Tennessee taxpayers forgo $1.2 million each year to subsidize a single job through the state’s largest business tax break program.

An independent firm hired by state officials found that some tax credits awarded to companies had negligible economic impacts, according to the consultant’s report, which was completed in December and recently obtained by The Tennessean.

The report highlights trade-offs facing state lawmakers here and elsewhere. Companies expanding or relocating often shop around for state business incentives, so economic development officials covet tax breaks as a selling point. But if Tennessee collected the $142 million it forgoes each year because of the business tax credits, the state could pave nearly 800 miles of interstate highway lanes or hire more than 2,300 teachers — investments also considered key to a healthy economy.

“I’d be asking the question, is there a better way to design our incentives to be more productive?” said William Fox, the director of the Boyd Center for Business & Economic Research at the University of Tennessee. “States are beginning to recognize there is a lot of money in- volved here.”

Tennessee economic development leaders say tax credits are just one part of a business-friendly formula that has boosted private-sector growth. Companies in the state added 395,400 jobs since February 2010, the national low point of the recession, according to federal data. That’s an increase of 18 percent, compared to about 15 percent nationally.

“We’re looking at the total impact, not just for one credit,” said Ted Townsend, the chief operating officer of the Department of Economic and Community Development. “These are working. They are effective. The job growth speaks to that.”

When the Tennessee legislature reworked some of the business tax breaks in 2015, it required the Department of Economic and Community Development, along with the Department of Revenue, to study the economic impact of tax credits. The state agencies hired Chicago- based consulting firm Anderson Economic Group.

Experts praised Tennessee for taking a hard look at the programs.

“It’s much better than your average study,” said Timothy Bartik, senior economist at the W.E. Upjohn Institute for Employment Research, who wasn’t involved in the report. “The state of Tennessee is to be commended.”

Using state data, analysts teased out the impact specifically from the tax breaks, separate from the hiring and spending these companies would have undertaken anyway.

Businesses that received the Industrial Machinery Tax Credit actually hired fewer people, on average, than their peers in the few years after taking the credit, the consultants found. When taking into account a ripple effect — how much the additional spending affected other parts of the economy — the annual impact came out to an additional 55 jobs per year.

That particular credit cost the state an average of $66.7 million per year from 2011 through 2014, or $1.2 million per job.

 

“The results show that, on average,the industrial machinery credit does not have a significant effect on employment,” the authors wrote in the report “The Economic Impact of Business Tax Credits in Tennessee.”

One explanation for the meager job growth could be that companies are automating job functions and buying expensive equipment that doesn’t require many workers to operate.

“At first that sounds like a really bad thing,” said Fox. “Having said that, it’s important to recognize that appropriate investment in Tennessee companies is key to Tennessee’s future.”

When Volkswagen was considering a 1,350-job expansion at its Chattanooga facility in 2013, for instance, the state offered $20 million of industrial machinery credits, among other incentives.

Businesses in manufacturing, warehousing and distribution, headquarters and call centers can claim a tax break from 1-10 percent of the purchase price of qualified equipment, depending on the size of the investment. Lawmakers in recent years expanded the industrial machinery credit to include research and design facilities and data centers.

Besides employment, the credit generates an annual average of $7.4 million in additional economic activity and $2 million of worker earnings, the consultants found.

 

Tax debate

The economic impact report comes at the beginning of the state legislative session, when the governor and lawmakers typically float proposals to rework the tax code. With a long backlog of highway repairs, Gov. Bill Haslam is pushing for an increase in the state gas tax. He also wants to cut business taxes by $113 million, and to further cut the income tax on dividends and interest.

When he was running for governor, Haslam said “any incentives or credits the state offers should be based on a clear potential for a positive, measurable return on investment.”

Haslam has focused much of his economic development strategy on cash grants for businesses, while ushering in some new or expanded tax credits. From 2011, Haslam’s first year in office, to 2014, companies claimed 17 percent more credits, according to the study.

 

Jobs tax credit

The second-largest business tax break in Tennessee is the Jobs Tax Credit, which cost the state an average of $52.1 million annually from 2011 to 2014. It gives companies a credit of $4,500 per job, with enhancements depending on how much a company invests in the state and where it locates.

Consultants found the jobs credit had a broader economic impact. When taking into account the ripple effect, the jobs credit generated an average of 600 jobs per year, according to the report. That equates to about $87,000 per job.

Experts cautioned that the effect on hiring lasts longer than the year credits are awarded. Companies that retain employees could continue to benefit the state economy over the long run.

 

“They cost a lot of money in the first year,” said Bartik from the Upjohn Institute. “The key issue is whether these jobs persist.”

Researchers didn’t address how long companies that received credits retained the new jobs. They were unable to get information about individual companies because of Tennessee’s strict tax confidentiality law. Also, the state doesn’t require job retention. Tennessee is one of only two states that does not reward companies for keeping jobs over an extended period, among seven peers reviewed by the consultants.

If jobs continue for years, the $87,000 investment may be reasonable, Bartik said. But $1.2 million per job for the machinery credit? “It doesn’t even make any sense if the jobs are permanent.”

Tennessee might improve its jobs and industrial machinery credits, the authors recommended, by adding a “clawback” provision and allowing companies to take more of the credits up front. Currently, companies are limited in how much they can claim each year. A clawback would require businesses maintain the number of jobs, wages and investment they promised over time, or be forced to return the funds that they obtained.

Also, researchers found Tennessee’s Corporate Headquarters Sales Tax had a “negligible economic impact” and the jobs tax credit for people with a disability was not being utilized.

State officials haven’t decided on any of the recommendations yet, said Townsend from the Department of Economic and Community Development.

Source: Knoxville News Sentinel, by MIKE REICHER

The East Tennessee Economic Development Agency markets and recruits business for the 15 counties in the greater Knoxville-Oak Ridge region of East Tennessee. Visit www.eteda.org

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