Study shows targeted investments not worth the dollars

By Steve Wilson | Mississippi Watchdog

When a new megadeal with a corporation moving to Mississippi is announced, politicians hold a news conference, cut a cake, boast about the number of jobs created and toss some dirt with gold shovels.

A study by the Mercatus Center at George Mason University might put a damper on the party. The recently published research by Christopher Coyne and Lotta Moberg casts a major doubt on whether these targeted investments meet their goals of economic revitalization and job creation.

One of the costlier examples the study cited included Michigan, where the study found the Economic Growth Authority Tax Credit Program’s cost was $45,000 per job. The worst offender was Louisiana, whose $1.7 billion in incentives to Cheniere Energy to create 255 jobs and retaining another 77 added up to $7.5 million per job.

Coyne said one of the things that surprised him in the course of his research was how little the true costs to taxpayers and the political system were discussed.

“Most treatments of the issue overlook the various costs associated with these types of policies,” Coyne said. “Specifically, that it incentivizes lobbying and cronyism so that companies can receive these benefits. Part of this is a rhetorical issue in that the term ‘targeted benefits’ implies a net benefit to citizens. Our study highlights that net benefits cannot be assumed and often never emerge.”

Mississippi is no stranger to these types of incentive-laden deals, giving more than a billion dollars to Nissan, $354 million to Toyota and $130 million to Yokohama Tire to build plants in the state. According to Good Jobs First’s Subsidy Tracker, Mississippi is ranked 17th, giving out 1,479 subsidies that added up to $2.9 billion.

See Mississippi’s top 10 crony capitalism deals here

Nicole Kaeding, a budget analyst at the Cato Institute, said these kind of economic development deals are indicative of a less-than-ideal business climate in the state. The Tax Foundation ranks the state 17th in its State Business Tax Index.

Mississippi has both a corporate income tax and a corporate franchise tax, in addition to a personal income tax. The corporate income tax has a step rate at 3 percent for the first $5,000 of taxable income, 4 percent on the next $5,000 of taxable income and 5 percent on income greater than $10,000.

The franchise tax is $2.50 per $1,000 of net worth or capital used or invested in the state, depending on which is greater.

“Policymakers who offer targeted tax incentives are implicitly acknowledging that Mississippi’s tax code is burdensome and uncompetitive,” Kaeding said. “Instead of selectively rewarding a few businesses, state and local policymakers should focus their attention on reforming the tax code. That is harder politically, but is the better long-term solution.

“Lowering rates and simplfying the tax code will help Mississippi’s economy grow without having to award sweetheart deals that benefit only a selective few.”

Coyne and Moberg have several solutions to deal with the issue. They would:

• Allow current targeted benefits to expire and end state programs that grant them
• Make sure targeted benefits cannot be granted on an ad hoc or informal basis
• Cooperate with other states to form an agreement about dismantling targeted benefits
• Lower tax rates to create a better business climate.

“Targeted benefits are grounded in favoritism and cronyism,” Coyne said. “General policies affect everyone equally. This is why we argue for a generality principle in our conclusion. Let’s say that a state or municipality wants to attract more business. Instead of offering targeted benefits to a few select companies (but not others), we argue for a general reduction of taxes and/or regulations, which increase the cost of doing business.”

Contact Steve Wilson at swilson@watchdog.org

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