March 30, 2009
Incentive Paybacks Keep Players Honest
I have spent a disproportionate amount of my time thinking about tax incentives to business. The result has been one book, and a whole slew of academic papers (the type with Greek letters, and extensive mathematical notation that are so helpful in putting toddlers to sleep). As a result I have read with keen interest a proposal in the Indiana House that affects the State tax incentive program.
House Bill 1338 introduces a change to many (but not all) of our State’s tax incentives, adding what is known as a clawback provision. This requires businesses that receive tax incentives but have not met their stated jobs or investment goals to repay all or part of these incentives. By my count more than 20 states currently have clawback provisions, and I believe it is a growing trend. But by my reckoning, this is a piece of legislation that offers a reasonable and fair adjustment to our current tax incentives. Here’s why.
Economists who have studied tax incentives have not found much to praise. I think this is for three reasons. First, nationwide the use of tax incentives has been ill documented and poorly executed. Even if they have been successful (and certainly many have been, the data is often too poor to analyze results. Second, firms have a huge incentive to misrepresent their plans. Firms that are ruthlessly truthful about their investment and job creation expectations may be at a real disadvantage when facing those who tell a less honest story. A very important study of Ohio firms in the 1990s found that firms that received tax incentives produced far fewer jobs than they promised than those who did not receive the incentives. Finally, most incentives are really only traditional infrastructure investments that the state or local governments would make under any circumstances. They are simply part of good state and local government masquerading as a ‘business incentive.’
Indiana has a superb reputation regarding tax incentives. The state is careful, limited and transparent with their provision of tax incentives. They go to very few firms, and only those that are truly ‘footloose’ (unlike California and West Virginia that give millions of dollars to big box retailers). The folks at a group known as “Good Jobs First” a union financed incentive watchdog give Indiana an A grade in the transparency of their program. Despite the care and limitations of our programs, we do very well in business attraction. We can still be more prudent.
The clawback provisions in HB 1338 are reasonable. The required repayment of incentives by firms that do not meet their commitments places only a modest burden on new businesses. This bill keeps Indiana in the group of honest players when it comes to tax incentives. That is where we need to stay.
About the Author
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