August 4, 2019
Indianapolis’ Wise Move on Tax Incentives Is Only a Start
Last week Indianapolis announced they would no longer provide tax abatements to companies paying any worker less than $18 an hour. This welcome news coincided with announcements by Kansas City and Austin to suspend tax incentives. Perhaps the incentive fiasco surrounding the Amazon and Foxconn deals are finally garnering the attention of serious policymakers. Still, there is a lot to consider in the Indianapolis decision.
Indianapolis has done as well in many ways since the turn of the century. The metro area boasts a diverse set of communities, including one county that is among the top ten fastest growing places in the nation. There is a solid mix of job opportunities, a suite of successful athletic teams, a more vibrant downtown and four research universities with 140,000 students within an hour’s drive from the city center.
The metro area also has problems. The large Indianapolis Public School system is troubled, with a graduation rate among the worst in the state. Most kids do not pass their end-of-course tests in math and English and out of a school system with 27,630 kids, only 123 began school in one of those four nearby research universities last year. Two-year colleges see the largest cohort of IPS students with 111 in the last cohort heading to Ivy Tech. According to the Indiana Commission for Higher Education, a shocking 1 percent complete on time. This is hardly a pathway to economic success. Despite much hard work by school officials and substantive educational reform, Indianapolis schools remain a drag on growth of the city’s population.
The city’s desire to rework tax incentives to focus on highly paid jobs is an improvement on current policy. However, that policy change came in the wake of a Brookings study that sidestepped the single most critical issue facing most Midwestern cities. The problem facing America’s heartland cities is not really a shortage of good jobs, but a shortage of effectively skilled and educated workers.
A quick glance at recent job creation data in the U.S. tells a very clear story about education and skills. Over the past 25 years, about 75 percent of net job growth has gone to college graduates, and the remainder to those who have attended college or hold a two-year degree. This pattern strengthened after the Great Recession, with more than 80 percent of net new jobs going to college graduates. The U.S. actually has fewer jobs for high school graduates or less education than we did in 1990, but 30 million more for college graduates and nearly 12 million more for those who have been to college.
In Indianapolis, the story is different. Since 1998, the Indianapolis economy has added more than 44,000 jobs for workers without a high school diploma, but only 38,000 for college graduates and 32,800 for high school graduates. The bright spot is that greater Indianapolis added more than 58,000 for adults who attended college or received an associate’s degree. Thus, the region saw strong demand for workers with a community college degree. That is a painful reminder that only 1 percent of students from Indianapolis Public Schools who attended community colleges completed on time.
The situation since the recession has worsened. In the Indianapolis metro area, a full 24 percent of job growth has gone to high school dropouts, but only 7 percent to college graduates. The economics of this are supported by common sense. If there were an abundance of workers, but too few good jobs, then most job growth would be concentrated among the best educated workers. Instead, most jobs are going to the least educated workers. It should be no surprise that the skill mix of jobs moving to Indianapolis roughly match the skills of the incumbent workforce.
That doesn’t mean Indy’s new incentive policy is wrongheaded, though. A glance at wage growth by education levels clearly signals that the city is attracting an oversized share of low wage employers. Overall, inflation-adjusted wages for high school dropouts have risen by 5.7 percent since the end of the Great Recession, while wages for college graduates have risen by only 3 percent. Still, the wage premium for a college graduate are 82 percent higher than for a high school graduate. This is prior to considering any fringe benefits, which are sure to drive the wage premium well over 100 percent.
This brings us to a tough, but obvious set of answers about Indianapolis’ economy. Every bit of trustworthy data rejects the notion that there are too few good jobs in Indianapolis. Likewise, there are not too few workers. The real problem is that the mix of skills available in the metropolitan area favors lower skilled, lower wage industries. This is a distillation of Indiana’s chronic but increasingly acute economic problem. That brings us back to the incentive issue.
Tax incentives matter a lot to low-wage employers, but not so much to high-wage employers. Firms that pay well and hire skilled workers care a lot about the things that are attractive to those workers, such as good local schools, paved roads, low crime, recreational attributes and other quality of life features. In recent years, Indiana tax incentives have become the most generous in the Midwest, and we have the lowest effective tax rate on manufacturing in the Midwest.
There are advantages to being a low-cost place to build a business, but there are also risks. Incentivizing low-wage firms to locate in Indiana necessarily results in fewer tax dollars available to address those things high-wage employers and their workers care about. As a result, Indiana is increasingly shifting the economy towards a higher mix of low-wage, low-skilled employers and employees.
Incentives have both intended (good) and unintended (bad) consequences, no matter how often a consulting firm makes claims to the contrary. Indianapolis has just taken a first step in admitting that skyrocketing tax incentives failed to deliver broad benefits to their residents. There is a lesson in that for every Indiana community.
About the Author
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