Taxpayers can’t afford blank checks to business

1/6/2013

Santa Claus has parked his sleigh for another year. But for a lot of businesses, the penchant of state officials — including those in Ohio and Michigan — to play Jolly Ol’ Saint Nick with taxpayer money is the gift that keeps on giving.

Ohio offers hundreds of millions of dollars each year in economic incentives — grants, loans, a broad array of tax breaks — to businesses. The case that these incentives stimulate valuable development and help preserve and create good jobs, in Ohio and the states with which it competes, is frequently more asserted than proved.

What is clear is that the money states spend on such corporate subsidies is money they’re not spending on education or transportation or public works or other essential services. Especially at a time when Ohio continues to slash state aid to local governments and school districts to balance its budget, these incentives demand strict scrutiny.

In a letter on the adjacent page, former Gov. Ted Strickland argues that strategic incentives provided during his administration helped northwest Ohio build its burgeoning alternative-energy industry. He’s right.

Too often, though, companies that pocket incentives don’t keep their promises of jobs, pay, training, investment, and eventual higher tax payments. Too often, state governments make an inadequate effort to claw back the money these companies took without holding up their end of the bargain.

Too often, state officials’ efforts to pick winners and losers through the incentives they bestow seem motivated more by politics — and the next election — than by sound long-term economics. And too often, companies have whipsawed Ohio and Michigan for economic packages, with Toledo caught in the middle.

State officials concede that corporate incentives have become an expensive zero-sum arms race, but insist they can’t unilaterally disarm. At the very least, though, states must ensure that the tax incentives they provide are well managed, affordable, and transparent.

Among recent evidence that suggests that isn’t always happening:

●Ohio Attorney General Mike DeWine reported last month that 93 of 255 businesses receiving state economic development awards that were scheduled to end in 2011 were not in “substantial compliance” with the terms of those awards.

Mr. DeWine did note that the Ohio Development Services Agency, which administers incentives, launched recovery actions against most of the deficient recipients. One of the largest clawbacks: a bill of nearly $1.4 million to Chrysler, which as the former DaimlerChrysler Corp. got a $4 million state grant to help keep 2,990 jobs in Toledo, but actually preserved 1,858 jobs.

●A new report on state tax incentives by the Pew Center on the States observes that the Ohio General Assembly created a two-year, $100 million investment tax credit for small businesses in the current budget, without getting an official estimate of its fiscal impact until after lawmakers passed the measure.

●A series last week in The Blade reported that companies whose employees made big donations to political action committees, campaigns, and parties in Ohio over the past five years got larger incentives from state government than those whose workers were less generous. Present and past state officials, Republican and Democratic, insist there’s no quid pro quo.

●A separate investigation of economic incentives by the New York Times late last year described how Michigan provided $14 million in tax credits, and a state pension fund guaranteed $18 million in bonds, to build a movie studio in the economically battered city of Pontiac. The project created 12 permanent jobs.

The Pew Center report, “Avoiding Blank Checks: Creating Fiscally Sound State Tax Incentives,” warns that states that don’t control the cost of their tax incentives court fiscal risks. Yet many states treat incentives as entitlement programs for business, the study concludes, not limiting the amount they spend each year or even developing reliable estimates of how much the incentives will cost.

“States aren’t really documenting what works and what doesn’t,” says Jeff Chapman, a senior researcher with the Pew Center. “Whether for political or other reasons, legislators often don’t treat these programs like any other spending item in state budgets.”

The report notes that Michigan closed one of its largest tax incentives for job creation to new businesses last year. But companies still can qualify for incentives under the program for another 20 years, making cost control difficult.

Michigan’s notoriously generous film tax credit cost more than $280 million from the 2009 to 2011 fiscal years before the state converted it to a grant program and limited it to $50 million this fiscal year. The Pew report observes that the original credit placed no limit on the number of films that would qualify, and lawmakers approved it without knowing how much it would cost.

Ohio officials are showing a bit more restraint. The administration of Gov. John Kasich says it is de-emphasizing tax incentives within its economic development strategy. Mr. Chapman told me that the state is developing several promising initiatives to monitor and evaluate the incentives it provides.

The Pew study reports that unlike Ohio’s small-business tax credit, separate credits for job retention and historical rehabilitation did get fiscal estimates in advance. Lawmakers limited spending on those incentives to $25 million and $60 million a year, respectively.

Used prudently, state incentives to businesses can yield a good return on investment in attracting jobs and boosting economic growth. As Mr. Chapman notes, the choice that states face isn’t between offering no incentives at all and tossing them around like party favors.

Rather, it’s a question of knowing — and responsibly limiting — what you pay out each year in incentives, and determining what you get in return. In tough economic times, this area of state spending needs the same close, common-sense attention as any other.

David Kushma is editor of The Blade.

Contact him at: dkushma@theblade.com