Bacon's Rebellion

Democracy Thrives in Sunlight

Incentives Have Negative Impact on State Fiscal Health

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by

James A. Bacon
in

Subsidies, tax breaks and other economic development incentives may attract corporate investment to a state, but do they pay for themselves or represent a net drain on state resources? Based on data from 32 states, a study by four North Carolina State University researchers find that the overall net effect is mildly negative, although results vary by the type of incentive.

Fortunately for Virginia, according to that data, the Old Dominion ranks second-to-the-bottom for incentives as a percentage of economic value added.

“The results of the analysis show that financial incentives negatively impact the overall fiscal health of the states offering the incentives. ,” conclude the authors of “You Don’t Always Get What You Want: The Effect of Financial Incentives on State Fiscal Health.”

While the effects may appear small, it is important to note that even the smallest of changes in a financial ratio can have large and long-term impacts on a government. This has important implications for states considering the use of financial incentives, particularly those undergoing fiscal stress. While financial incentives may have an economic return on investment, they come with a high cost to the state’s financial sustainability. As such, they are a financial tool that should only be used with caution.

In an interview with Governing magazine, lead author Bruce D. McDonald III said that the incentive most associated with weaker state fiscal health was research and development tax credits. When successful, R&D generates broad effects nationally but relatively little locally. Property tax abatements had a mild negative effect. Job-creation tax breaks had little effect, either positive or negative, on state fiscal health.

Bacon’s bottom line: Extrapolating from the study’s data, I would humbly suggest that Virginia appears to be more parsimonious than most other states in doling out grants and tax-breaks. More than other states, Virginia appears to rely upon the virtues of its business climate to attract corporate investment — as it should.

(Hat tip: Peter Blake)

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7 responses to “Incentives Have Negative Impact on State Fiscal Health”

  1. djrippert Avatar
    djrippert

    Before you throw your shoulder out patting yourself on the back …

    Real state GDP growth from 2009 – 2017 (per Federal Reserve Bank of St Louis):

    Virginia – 8.9%
    Maryland – 32.1%
    North Carolina – 33%
    Tennessee – 39%
    West Virginia – 17.4%

    If you must drink the Richmond Kool Aid, try to sip rather than chug.

  2. Izzo Avatar
    Izzo

    Depressing data points from DJ. The economic growth does not seem to correlate too closely with incentives spending. Virginia of course is low in both, but Maryland had impressive 32% GDP growth and just above Virginia in incentive spending. Tennessee, however, is high in both incentive spending and has really impressive 39% GDP growth (see post on Nashville). NC is closer to middle of the pack on incentives but growth is 3X+ that of Virginia. WVA does not show on incentives, but I suspect they are much higher than VA.

    I think either approach could work. It really depends on the state’s situation and the quality of the incentives. Most at the top aren’t setting the world on fire with economic dynamism, though.

    Virginia has historically had a lot of advantages (natural ports, proximity to DC, high military spending, rivers that run West-East, beginnings of industrialization before other areas of the South, etc.) but needs political and structural changes urgently. Lack vibrant urban centers, business interests capturing the legislature, and a higher ed system that hasn’t spawned significant economic growth all hold Virginia back relative to its neighbors.

  3. djrippert Avatar
    djrippert

    “Virginia has historically had a lot of advantages (natural ports, proximity to DC, high military spending, rivers that run West-East, beginnings of industrialization before other areas of the South, etc.) but needs political and structural changes urgently. Lack vibrant urban centers, business interests capturing the legislature, and a higher ed system that hasn’t spawned significant economic growth all hold Virginia back relative to its neighbors.”

    Fabulous summary.

    The economic expansion since the so-called Great Depression has been called the longest running expansion in American history. Where’s the beef in Virginia?

  4. Steve Haner Avatar
    Steve Haner

    The beef has turned blue…..

    I’m sorry, this whole thing smells bogus. Incentive dollars as a percentage of “value added by each state’s industries.” I don’t even know what that means, “value added.” Not a percentage of government spending or total GDP? That measure looks to me like a conclusion in search of a denominator. No matter which state is studied, the effect is always negative. Conclusion – it’s all bad and the government will better spend the money. Uh, nope. Don’t confuse Governing magazine (an industry rag for the government industry) with the WSJ or even Harvard Business School.

    Here is the beef turning blue before your eyes:
    https://bluevirginia.us/2019/05/yes-virginia-we-can-stop-the-mountain-valley-and-atlantic-coast-pipelines-heres-how

    1. Reed Fawell 3rd Avatar
      Reed Fawell 3rd

      Steve: Thank you for pointing out that Blue Virginia article:

      https://bluevirginia.us/2019/05/yes-virginia-we-can-stop-the-mountain-valley-and-atlantic-coast-pipelines-heres-how

      What is particularly horrifying now is that Virginia’s political class is following the footsteps of New York’s Gov. Cuomo in rejecting critically needed oil gas pipelines, this time his rejection this week of a 23 mile natural gas pipeline connecting New York City and Long Island with Pennsylvania’s shale gas fields.

      This will throttle electric power supply in the Big Apple, drive consumer prices there sky high, and render an already weak and unreliable and failing wind and solar energy initiative there even more so. Indeed, solar and wind need will more gas there instead to have any chance even of marginal success, given that gas keeps solar and wind on life support. In the face of this reality on the ground in the real world, Cuomo falsely promises to raise New York’s current 5% solar and wind supply to 50% by 2030, only 11.5 years from now. And he’s going to compound that fantasy, make it’s impact far worse, by pushing to shut down New York City’s nuclear power source, Indian Point, within two years from now. This ensures energy shortages and sky high prices as a follow on act to running Amazon out of town. Virginia can’t afford to imitate NY’s Fool’s Errand, and sabotage its own future along the way.

      1. James A. Bacon Avatar
        James A. Bacon

        Energy policy will be the acid test of the Blue State vs. Red State governance model. We can all argue until we’re blue in the face. In the end, only reality will answer who is right and wrong.

        1. Reed Fawell 3rd Avatar
          Reed Fawell 3rd

          I agree. I just hope we don’t crawl so far out on the wrong limb, that we cannot get back to the right course before we do enormous, perhaps irrevocable, harm. Right now the ideologues, their gasp for control, terrify me, given they were so successful with blacklisting nuclear, a monumental mistake. And now they are trying to do the same with gas as a bridge at least. Its madness, based on my past experience, as brought up to date by the reading I trust the most.

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