What are and why you should know about economic incentives to scale your business.
"The primary objective of incentives is to promote local investment and hiring." Abraham Song.
ENJEN is happy to offer value in sharing this article written by Abraham Song, on January 11th, 2021 for DCPolicycenter.org. You will find great explanations for business leaders that promote the understanding of cash flow tools offered by private and public organizations which are powerful growth energizers. Click here to read the article:
What are tax incentives for economic development?Incentives are “tax breaks, cash grants, loans, or services” that target individual firms or industries with the objective of promoting job growth. Timothy Bartik, economist at W.E. Upjohn Institute and the foremost expert on the topic, classifies incentives into five broad types: property tax abatements, investment tax credits, job creation tax credits, R&D tax credits, and customized job training subsidies.
The primary objective of incentives is to promote local investment and hiring. Following the Great Recession, states have become hard-pressed to create jobs, protect jobs, and reduce unemployment rates. Many have turned to tax incentives to accomplish these goals. These pressures are only amplified by the pandemic-induced economic recession.
The primary target of incentives is the relocation and expansion of large firms. Incentives target large firms for their ability to both create many high-paying jobs and make significant capital investments.
Business incentives offered by state and local governments are substantial at around $50 billion annually for export-based industries (See Table 1). This amounts to about 1.4 percent of all industry value-added—how much that industry contributes to the GDP—and about 30 percent of the average state and local tax liability to businesses (Bartik 2017). These numbers are also comparable to state corporate income tax revenue, which was $45 billion in 2013.
Who gets tax incentives?Incentives go to firms in virtually every industry both large and small, profitable and unprofitable, domestic and foreign. The largest incentive deals nationally are found in the manufacturing sector, oil and coal conglomerates, technology and entertainment companies, and banks and retail chains. Research suggests that states can get the best “return on investment” by targeting export-based industries. This is because export-based industries have the highest employment multiplier effect.
What is an Employment Multiplier effect?
The employment multiplier is one type of measure used to determine the impact a particular industry will have on the local economy upon its arrival or departure. It estimates the total jobs generated as a result of one job in that industry. According to Upjohn Institute’s estimates, high-tech sectors is believed to have highest multipliers, as high as 2.9. That is, for each new high-tech job in a city, 2.9 additional jobs are created (e.g., lawyers, teachers, nurses, waiters, hairdressers).
When studying tax incentives, economists like to distinguish between export-based industries and non-export industries. An export-based industry refers to a sector in which goods and services produced locally are “exported” (not necessarily to other countries but other areas) and consumed outside the local economy. For example, publishing (which falls under the “Information” classification) is generally considered export-based: almost all the work that goes towards producing Washington Post happens in D.C., but readership is spread across nation. In contrast, real estate is generally considered non-export-based since almost all the work done by realtors is consumed by D.C. residents. (See Table 2).
Research suggests that targeting export-based industries is the most effective incentive-granting strategy. These industries are more likely to create many jobs in the local economy. Giving incentives to non-export industries is likely to displace jobs at existing local non-export industries. Consider that a large retailer, like Walmart, offers to invest in the local economy and hire workers in return for state business incentives. Walmart is in the retail industry, which is a non-export sector with low multiplier effect. If Walmart enters the local market and creates 500 jobs but wipes out 600 jobs in local grocery businesses – the result will be a net decline in 100 jobs, a displacement effect. Given that tax incentives are large, it is likely that the retailer’s long-run tax contribution to the state will be less than the total tax contribution of all mom-and-pop shops, leading to a decline in the total tax revenue for the state.
The next section introduces the database used for the analysis. We use the database to identify which of District’s industries receive property tax abatements as well as the value of the assessment. Next, we compare District’s state and local business incentives with other jurisdictions.
Learn more about the data and read the full article here: https://www.dcpolicycenter.org/publications/background-tax-incentive-strategy/