States Cut Tax Incentives for New Business

May 10, 2010
http://online.wsj.com/article/SB20001424052748704292004575230572733212874.html

In New York, Gov. David Paterson, a Democrat, has proposed deferring dozens of business tax credits for three years, while Missouri Gov. Jay Nixon, a Democrat, wants to reduce the amount of tax credits developers get for restoring historic buildings. A new Oregon law scales back credits given to certain renewable-energy projects. Iowa Gov. Chet Culver, a Democrat, signed a new law that halts tax credits to filmmakers and reduces other economic development lures.

Tax credits are an easy target for governors and legislators looking to close ongoing budget gaps caused by falling sales, income and other taxes. Eliminating or reducing such credits can boost coffers without creating new taxes or raising them on broad swaths of the population.

But hurdles remain to passing these rules as critics, such as business organizations and economic-development officials, say that removing targeted tax credits will crimp hiring and investment at a time when the economy needs both.

In this year's budget proposal, New Jersey Gov. Chris Christie, a Republican elected last year promising to bring fiscal austerity in the Garden State, outlined broad spending cuts including reductions in school spending and less aid to townships. But Mr. Christie's plan also suggests the state end tax credits for film and television production, $15 million of which were handed out last year. Mr. Christie's budget proposal also suspends an income-tax revenue-sharing program that provides $100 million a year to development projects in poorer urban areas.

States collected $686 billion in tax revenue in 2009, down 11.4% from the year earlier. Their costs, meantime, are skyrocketing: Investment losses have forced many states to make added contributions to pension funds, while the recession and recovery has increased demand for social services such as food stamps and health care.
To plug their budget gaps, states have cut employees, benefits and in many cases raised taxes. Amid that backdrop, a more-skeptical eye toward tax breaks was inevitable.

"At a time when sharp drops in revenue are forcing state and local governments to lay off teachers it makes a lot of sense to take a hard look at tax subsidies to business," says Michael Mazerov, a senior fellow at the Center on Budget and Policy Priorities, a left-leaning think tank.

But Mark Sweeney, a principal at site-selection firm McCallum Sweeney Consulting, which helps companies find locations for new offices, says cutting these programs is a bad idea. "I think it's very short-sighted of states to curtail important elements in their investment and employment attraction policy," he says.

Indeed, some states are going the other direction. Minnesota recently signed a bill with various tax credits, including a break for so-called angel investors who put money in young companies.

But the fiscal crisis has made it difficult for state legislatures to pass expanded economic-development credits. In South Carolina, for instance, a bill that would expand and add new tax credits for businesses relocating to the state is held up in the Senate. With tax revenue so stressed "when you try to pass a bill that would cost the general fund money you've got people who are going to object," says South Carolina Republican state Sen. Billy O'Dell.

Meantime, the move to curtail tax credits and other economic-development programs has opened a window for critics who say such programs are largely ineffective. William Fox, a professor of economics at the University of Tennessee who specializes in state tax policies, says few tax credits have any real bearing on where companies locate or how they spend and hire. "Taxes matter, but not very much," he says.

Such thinking is why some states are proposing laws to require companies that get economic-development grants and credits to document how the state's investment is being used. Colorado's House recently passed a bill that would require companies that get economic-development grants or tax breaks to file annual reports that show, among other things, the median salary of the jobs they have created with the money.

"We give out between $800 million and $1.2 billion annually in corporate incentives with virtually no data on which of these are successful at creating jobs and which are failures," says Colorado Democratic state Rep. Sal Pace, the bill's sponsor.

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