June 5, 2022
Mindless Economic Development Strategy?
The past couple weeks saw Hoosier leaders celebrate two new factory announcements in the state. Together they promise 1,900 factory jobs and roughly $4.6 billion in new investment. Unsurprisingly, this is the sort of thing elected leaders like to tout. The sunny economic development press release is older than the nation and is an especially bipartisan indulgence.
Still, if you pay attention to this sort of jobs announcement, there’s no way around a feeling that something isn’t quite right. The reason for this is more than just gut instinct; much of what you see and read about these jobs announcements is raw political fiction. Sophisticated taxpayers should understand better what is happening. There are three parts that make me very uneasy and should worry taxpayers and responsible elected officials alike.
The first is the boldness of the claims, and the argument that job creation deals comprise a large part of the economy. This is flat nonsense. In a typical year, Hoosier businesses create about 0.5 million jobs across the state and destroy about 0.5 million jobs elsewhere. In some years there are more created than destroyed, and in other years we lose more jobs than are created. Either way, these 1,900 jobs spread out over the next few years are a measurement error in Indiana’s labor market dynamics.
The same is true with the capital investment. Today, Indiana has more than $0.5 trillion in capital investment. The aforementioned $4.6 billion sounds good, but spread out over two or three years is unlikely to account for 1/1,000 of the state’s capital investment in any year. As with the employment numbers, this is literally within the range of measurement error of business capital.
In a good year, the state’s economic development organizations will interact with firms that create maybe 4.0 percent of new jobs. That is a remarkable achievement for the small, hardworking staff at IEDC, but it does not provide evidence of statewide economic performance.
Our civic discourse would be better off if elected officials were more honest about these deals. But, given the bipartisan zeal for job announcements, it is up to the rest of us to educate ourselves. Still, political exploitation of these deals ranks at the bottom of my three worries. What bothers me more is the public spending for these jobs.
Boone County and Howard County, where these factories will locate, have unemployment rates at 3.1 and 3.8 percent respectively. Thus, there is no readily available workforce for these factories. Traditionally, this vacuum would draw labor from 30 or so surrounding counties. There might even be some in-migration because both counties have attractive communities. Still, most of the employees will come from other businesses already in the area or outside the county.
In a free market economy, that shifting of workers is fine; new businesses have every right to lure employees away from existing businesses. However, what is happening here is the absolute antithesis of a free market economy. We don’t yet know what the tax incentives will be for the Lilly factory in Boone County, but incentives are roughly $130,000 per job for the Howard County plant. That is just insanely irresponsible for many reasons. Some might even call it ‘Socialism.’
Much of the incentive will come from local taxpayers, including those businesses whose workers will now be lured away by someone paying no taxes in these communities. The benefits of these jobs will flow to the places where these workers live, leaving Boone and Howard County taxpayers to pay most of the costs while most of the benefits accrue elsewhere.
The state contribution to these incentives is performance based; the local contribution is an upfront payment with no realistic claw-back options. It is a dire mistake in state policy to view a tax giveaway as ‘skin in the game’ while local spending on good schools, safe neighborhoods and paved streets as not.
Even if these communities received all the benefit of this deal instead of the more realistic 10 percent, it’d still be a troubling public expense. Paying $130,000 per job to lure a new factory to Indiana makes for great headlines and happy press releases while still being the very definition of short-term, poorly informed tactical thinking. Tax incentives are not a viable economic development strategy.
If Indiana’s economic development strategy is to pay $130,000 per factory job, we are failing. The best way to understand this is to simply note that the cost to bring back the factory jobs we’ve lost over the past 20 years alone is more than $16 billion or roughly $5,600 per Hoosier family. Again, if this is Indiana’s economic development strategy, we should prepare ourselves for costly, repeated disappointment.
The Howard County factory is an auto parts manufacturing firm. The state has lost over 40 percent of jobs in this sector in 20 years, and we are 10 percent below where we were in this sector in just 2019. These new 1,400 jobs account for only 2.2 percent of total jobs in this industry. By the time these incentivized jobs materialize in two or three years, we are likely to have lost another 5,000 auto parts factory jobs. From a strategic standpoint, these incentives are like buying gold-plated buckets to bail out the Titanic.
An even worse revelation is that this industry pays wages that are 16 percent below the state manufacturing average. That might explain why the jobs announcement was so strangely silent on salaries. Again if this is successful economic development strategy, I shudder to imagine what a failing strategy might look like.
Despite the imprudence of the tax incentives, my biggest concern about this deal is not about poor political leadership. I’m under little illusion that the other political party would be more responsible with tax dollars. I’m more worried about what it says about the quality of businesses and business leadership we are attracting to the state.
Indiana’s tax on manufacturing firms is today the fourth lowest in the nation. To put this in shocking context, a single mother making $35,000 a year pays twice the effective state and local tax rate of the average manufacturing firm in the state. Likewise, non-manufacturing firms in Indiana pay nearly three times the average tax rates as factories. It is worth noting that non-manufacturing firms are the ones responsible for 180 percent of the state’s job growth since 2000. Try thinking on that for a few minutes.
The message to businesses should be plain. If paying the fourth lowest tax in the country is too onerous for your factory, you don’t have a viable business plan. Indiana doesn’t need you; go elsewhere. If your business wishes to use our public infrastructure, our public services (e.g., police and fire protection) and our graduates from public schools and universities but expects others to pay the bill, don’t come to Indiana. The state needs fewer business leaders like this, and that’s precisely the message prudent, thoughtful, market-oriented leaders should give to businesses.
About the Author
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