In a tough economy, some are questioning the use of tax incentives to convince businesses to relocate. Andy Shapiro, Managing Director of Biggins Lacy Shapiro & Co., Princeton, NJ gives us his perspective on whether tax incentives are an effective way to promote development.
BF: Are tax incentives often the determining factor in a company’s location decision?
AS: Twenty years ago, incentives typically received less weight during the initial site selection process, and became a more key determinant only as the project neared its final stages. Now, as cost control becomes more critical, the search for effective incentives plays a more pronounced role in earlier project stages. Incentives can swing an investment toward an otherwise comparable jurisdiction; or they can make the difference between a decision to move forward andone not to invest at all.
BF: Are tax incentives a cost effective tool for job creation?
AS: While there has been little research into how effective state job creation tax credits are in promoting job creation, Federal Reserve, researchers have found that these programs appear to be quite effective at increasing overall business activity within a state. Also, remember that in a growing number of states the tax credit per new job is a percentage of the state income tax withholdings associated with that job. So what you really have is a form of revenue sharing whereby very little public monies are spent on actual job creation. Finally, any calculus of job creation benefits should be sure to take into account the indirect and induced (or “downstream”) jobs created as a result of the multiplier effect from each “direct” new job.
BF: Will states reduce their reliance on tax incentives or will they view them as essential in the site selection competition?
AS: We have witnessed budgetary pressures in many states that have threatened existing incentive programs. Incentives targeting emerging industries, including investment tax credits and venture capital funds, appear to have taken the brunt of this impact. However, so-called “pay as you go” incentives such as job creation tax credits will likely endure as they are considered to be revenue neutral. Also, some states have chosen to double down during the recession and to increase incentives for new jobs and investment.
BF: Do you think tax incentives generally are applied too broadly?
AS: Incentives are pricing tools: their impact goes right to a project’s bottom line. State agencies and local jurisdictions use incentives to intervene in the market where a marginal, additional public investment is capable of leveraging significant additional direct investment. These jurisdictions have learned how to invest incentives where they would have made a difference, including having the ability to reverse an analysis where a competing locale was more cost effective. So, while there may be examples of the indiscriminate use of incentives, they are most effective when employed in a targeted fashion
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