Paul L. Caron

Friday, April 5, 2019

Weekly SSRN Tax Article Review And Roundup: Layser Reviews Barbieri's Lawmakers As Job Buyers

This week, Michelle Layser (Illinois) reviews Edward W. De Barbieri (Albany), Lawmakers as Job Buyers, 88 Fordham L. Rev. ___ (2019).

Layser (2018)Economic development tax incentives have been in the headlines a lot lately, thanks mostly to Amazon, which almost located its east coast headquarters in Queens, New York City. Before the deal collapsed, Amazon was poised to receive roughly $1.2 billion in refundable tax credits from the state of New York. In addition, the company may have qualified for tax-subsidized financing through the new Opportunity Zones program. (Amazon insisted that it would not participate in the program). The public was outraged. But as Professor Edward W. De Barbieri reminds us, the practice of wooing companies through large tax breaks is nothing new—and it leaves a lot to be desired.

Barbieri begins by providing a comprehensive overview of the tools state and local governments use to attract businesses. He describes how state and local governments use property tax abatements, tax credits, private activity bonds, and land use regulation like tax increment financing districts to subsidize private companies and influence their location decisions. He explains how such subsidies can have a negative impact on state and local budgets, particularly when they fail—and they often do.

Barbieri points to New York’s Empire Zone program as a particularly striking example of a failed program, in which the state provided extensive tax subsidies to businesses but never fully revitalized its struggling “rust belt.” Subsidized projects failed to grow the local tax base, despite “decades of local property tax exemption.” Yet, the political pressure to subsidize businesses has persisted, and neither doctrinal limitations nor past failures have curbed the use of economic development tax incentives.

The primary problem presented by such tax incentives, in Barbieri’s view, is that they promise jobs and increased state or local tax revenues but often fail to deliver. Compounding this problem, lawmakers are often unable to recover the funds that were previously authorized. To address these concerns, Barbieri proposes a two-step solution. First, states should solicit bids from developers and award the incentives to the bidder who promises new jobs at the lowest dollar amount. Second, the deals should include a mechanism to recapture incentives if the company fails to deliver the jobs it promised.

There is a lot to like about Barbieri’s proposal. My own research on economic development tax incentives has noted that many incentives—at all levels of government—tend to lack clear objectives, are heavily influenced by powerful business interests, and ultimately prioritize the interests of those businesses over the public interest. The proposed bidding process would help address these concerns by creating a public forum in which members of the public could voice their concerns (“outrage,” as Barbieri calls it) and help identify projects that would benefit the public. And the clawback proposal would force businesses and lawmakers to clearly define their goals before opening the coffers. Incorporating these proposals would go a long way to improving what is, in many respects, a broken system.

In addition to these specific proposals, Barbieri makes several suggestions to increase the likelihood that economic development incentives will increase the tax base. He suggests that the incentives be frontloaded in early years and cautions against refundable tax credits, which are more common in this context than one might expect. He notes that providing job training may be more beneficial to businesses than cash subsidies. Finally, he observes that the goal should be to create high-skilled jobs, which pay high wages and, therefore, have a strong potential to raise tax revenues. Low-skill, low-wage jobs, like those created by retail businesses, should be disfavored.

If I have a gripe about the analysis, it is this: in my view, the goal of increasing tax revenues through job creation is only compelling if the increased tax revenues will fund programs that promote distributive justice. Otherwise, such policies have the potential to harm vulnerable communities in order to benefit more politically powerful groups.

I believe Barbieri’s proposals may greatly improve the efficacy of what I call spatially oriented place based investment tax incentives—those that seek to maximize profit potential (and tax revenues) in a place, but lack safeguards for local communities. In some cases, this may be justified. After all, state tax revenues are essential to funding public welfare programs. But, in most cases, I think spatially oriented investment tax incentives should be abandoned in favor of community-oriented alternatives. This is especially true when low-income neighborhoods are the targeted investment locations, as is the case in laws like Opportunity Zones, the New Markets Tax Credit or state enterprise zones.

Ideally, community-oriented tax incentives would confer power to community stakeholders, link place to community, and incorporate a system for monitoring outcomes. To this end, Barbieri’s primary proposals are well suited. A competitive bidding system could increase transparency and facilitate communication with community stakeholders. But instead of focusing solely on the cost-per-job, lawmakers should consider which projects will provide the greatest benefit to the community. This may mean prioritizing projects that create low-skill, low-wage jobs that could be filled by local residents—even if they generate less tax revenue than manufacturing or technology jobs. Similarly, a clawback system and program monitoring would be essential, but the goals of community oriented tax incentives may encompass more than mere numerical job targets, which are only one possible measure of outcomes.

Despite these critiques, I highly recommend this Article for its valuable account of state and local governments’ use of economic development tax incentives and its thoughtful critique of the status quo. This Article should be of interest to any tax scholar interested in investment tax incentives, geography and taxation, or tax and poverty.

Here’s the rest of this week’s SSRN Tax Roundup:

Michelle Layser, Scholarship, Tax, Weekly SSRN Roundup | Permalink