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January 15, 2014

HICKS: Are tax abatements good business?

— The research center in which I work recently published three different studies evaluating the role of economic development programs in Indiana. The results of our work held some surprises and some not-so-surprising findings.

The first study evaluated the Indiana Economic Development Corp.’s suite of services. We made a number of small recommendations, suggesting, for example, that IEDC improve some website offerings, but it is clear that IEDC is offering among the most up-to-date economic development activities.

Moreover, the National Governors Association recently commissioned a study that strongly recommended that other states adopt the type of public-private partnership in state economic development efforts that is in use here in Indiana. IEDC employs roughly 65 persons, while several surrounding states had more than 400 workers. So I would expect a lot more states embracing our model.

Among the more interesting findings were that IEDC had significantly grown the number of employers it works with since shifting to the public-private model. In 2004, IEDC was working with employers of roughly one out of every 50 new jobs that came to Indiana. By 2010, that share had grown to more than one out of 25.

We also found that the new employers IEDC works with are more evenly distributed across the state than are new jobs as a whole. Still, most new jobs in Indiana never connect with the economic development apparatus at the local, regional or state level, which means that economic development efforts alone won’t create prosperity.

The second study examined tax incentives in Indiana, at the state and local level. It is worth noting that to ask me and my colleague Dagney Faulk to study the issue required a great deal of political courage by IEDC. Both of us have studied and testified on tax incentives in a number of states, and some of my work helped aid the demise of Michigan’s largest incentive program in 2012.

The data we used were of actual jobs created (according to the Department of Labor), and the size of the incentive reported by the states and counties. This is important because many critiques of the job-creating effects of incentives focus on the gap between the promised and actual jobs in a business. Economists think the important question has nothing to do with the business that gets the incentive, but rather the overall number of jobs in the region.

We found that the state-level incentives (granted only after the jobs are created) resulted in a new manufacturing job for every $1,000 or so of incentives. However, the costs to local government are closer to $30,000 per job. This prompted a final study on local tax abatements, which found that more liberal use of incentives was associated with higher taxes for other businesses and residents in a county.

We cannot tell for certain if this is because places with high taxes need to incentivize firms or vice versa. Either way, local tax abatements appear to be a costly way to boost the local economy.

— Michael Hicks is director of the Center for Business and Economic Research and professor of economics at Ball State University.

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