Subsidies, incentives, and tax breaks have become common tools of states, counties, and cities to create jobs. The result has been a competitive escalation, as regions try to outbid each other to woo corporations and the employment opportunities they can create.
But a recent study by the Kauffman Foundation suggests that the money only shifts jobs from one state to another and doesn't necessarily create them. State and local incentives rarely target the new and young businesses that actually do create jobs.
The subsidy escalation that states have entered has become a zero-sum game in which a largely fixed set of jobs shift from one state to another as companies search for the highest bidder. And even when new jobs are created, companies would likely have needed to add them anyway, and the cost per position to taxpayers can be astronomical.
Companies have focused on state subsidies because many federal funds expired at the end of 2013, according to the Wall Street Journal. Currently, 46 states offer 200 programs of tax credits. Companies use credits to lower the cost of doing business, which increases profits.
Because an increasing number of the credits are transferable, companies use exchanges to sell them to one another. This creates an entirely new industry that can lead to pure giveaways. For example, according to the Journal, half the transferable credits are for the movie industry. However, out-of-state production companies don't generally face state tax bills and either bring in their crews or create temporary positions for a few weeks. The production companies sell the credits, which improves their bottom lines.
Sometimes new jobs are created, but at a high cost. A study last year from advocacy group Good Jobs First found that in deals in which companies get a combination of credits and subsidies worth at least $75 million, the average cost per job was $456,000.
The subsidies and awards are sometimes the result of direct threats by companies to close down facilities. In 2011, Texas billed Amazon for $269 million in sales taxes. The company threatened to close its distribution center, and eliminate the associated 119 jobs, in the state. Texas eventually planned to give Amazon a pass, putting the effective cost per job at $2.3 million.
Subsidies and tax credits can result in bidding wars. Last fall, BNY Mellon pitted New York and New Jersey against each other, according to the New York Times. The bank planned to sell its headquarters and needed new office space. Whoever would put together the best offer would get the jobs.
The true irony, according to the Kauffman Foundation, is that little if any of the financial one-upmanship actually creates new jobs for citizens. "Some policymakers have expressed a desire to end this practice but feel stuck in an arms race," the study said. "They fear they cannot unilaterally forgo incentives because others use them, so they create ever-increasing incentive packages in an effort to compete. Although some incentives may be economically justified in terms of jobs and productivity, in the midst of an arms race it's difficult to tell what is and is not effective in creating jobs."