A New Business Incentives Database

Transcription

1 Presentations Upjohn Research home page 2017 A New Business Incentives Database Timothy J. Bartik W.E. Upjohn Institute, bartik@upjohn.org Citation Bartik, Timothy J "A New Business Incentives Database." Presentation prepared for Roundtable on Evaluating Economic Development Tax Incentives, Philadelphia, PA, November 3, This title is brought to you by the Upjohn Institute. For more information, please contact ir@upjohn.org.

2 A New Business Incentives Database Timothy J. Bartik Senior Economist W.E. Upjohn Institute for Employment Research November 3, 2017 Based on: A New Panel Database on Business Incentives for Economic Development Offered by State and Local Governments in the United States Support for this project was provided by the Pew Charitable Trusts. The views expressed in this report and this presentation are those of the author, and do not necessarily reflect the views of the Pew Charitable Trusts or the Upjohn Institute.

3 What is new about this new incentives database? More industry detail (45 industries, over 90% of wages) More years (26 years, ) 33 states (over 90% of US output) Detail on 5 incentive types: job creation tax credits, property tax abatements, investment tax credits, R&D credits, customized training Detail on incentive time pattern: how varies from Year One to Year 20 for new facility Free, open-access database 1

4 Database helps address these questions Is magnitude of incentives enough to significantly affect business location decisions? Do high-unemployment states offer more incentives? Do states target high-wage industries? Do states emphasize more efficient incentives? e.g., frontloaded incentives, customized services How much do incentives matter for growth? For evaluation of an individual state, database provides useful context, and model for what questions to ask and what methodological tools to use. 2

5 Methodology of database Hypothetical firm model Assumes new facility that opens up in base year, stays at same scale for 20 years. Taxes & incentives of base year projected forward Tax & incentive calculations based on BEA/IRS data on how mix of jobs, real property, machinery/equipment, R&D, and wage rates vary by industry. Taxes included are property taxes, sales tax on business inputs, and corporate income tax. Incentives included are job creation tax credits, property tax abatements, investment tax credits, R&D credits, and customized job training. Incentives only included if they are part of usual deal. 3

6 Database s outputs Taxes and incentives of each type for each of 20 years of facility operation, for 45 industries, 33 states, and 26 starting years. Taxes/incentives calculated as % of value-added = measure of firm s production = value of firm s sales minus its inputs from other businesses. Also calculate weighted average for 31 export-base industries: industries that sell goods/services outside state, bringing new $ into state. Report/database focus on present value of taxes/incentives as % of present value of value-added over those 20 years. Present value is calculated using very high 12% real discount rate. Why? Research evidence that this is discount rate corporate executives use in evaluating investment decisions. Implications of 12%: future heavily discounted. $ in year 10 worth only $0.36 in Year One. 4

7 2015 National Average for Incentives: 1.42% of value-added for export-base industries 6.00% 5.00% 4.74% 5.18% Export-base 4.00% Non-export-base 3.00% 2.00% 1.00% 0.00% Gross state/local business taxes 1.42% Incentives 0.16% NOTE: 2015 U.S. average, as percentage of value-added. Figures are for state/local business taxes, and state/local incentives. SOURCE: Bartik (2017). 5

8 Is 1.42% of value-added large? Large? 5.83% of business profits, 30.1% of state/local business taxes, annual national cost of $45 billion Small? 0.63% of sales, 3.07% of regular wages, $2,326 per worker job-year Based on literature on how taxes affect location decisions, reduced costs of 1% of value-added increases location decisions by 3 to 17 times as much Therefore, 1.42% cost reduction as % of value-added should tip between 4% and 24% of location decisions. 6

9 Incentives vary a lot across states, even nearby states New Mexico: 4.23% of value-added; Arizona: 1.06% New York: 3.53%; Connecticut: 0.65% Louisiana: 3.33%; Texas: 1.24% Indiana: 2.68%; Illinois: 1.35% S. Carolina: 2.39%; N. Carolina: 0.93% Wisconsin: 1.52%; Minnesota: 1.14% Oregon: 0.70%; Washington: 0.09% 7

10 Incentives have tripled since 1990 Incentives as Percentage of State and Local Business Taxes 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% SOURCE: Author's calculations. 8

11 Incentives/value-added (%) Incentives don t vary enough with industry characteristics that predict how much new industry will benefit state residents. For example, not much variation with wages: 3.00% Average Incentives as % of Value-added for 31 Industries, versus Industry Wages per FTE Worker 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% $- $50,000 $100,000 $150,000 $200,000 $250,000 Wages/FTE (annual $) 9

12 Incentives/value-added What determines incentives? Doesn t have much to do with a state s unemployment rate 4.50% State Incentives vs. Unemployment 4.00% 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 3.0% 3.5% 4.0% 4.5% 5.0% 5.5% 6.0% 6.5% 7.0% 7.5% Unemployment 10

13 Job growth increases employment to population ratios more when unemployment is high: This increases labor market and fiscal benefits of new jobs % 90.0% 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% % of Job Growth to Local Non-employed 94% "High" UR (10.0%) Average UR (6.2%) 67% "Low" UR (4.2%) 54% 35% 20% 13% Year 11 SOURCE: Bartik, T. (2015). Growth and Change.

14 2015 Incentives Biggest determinant of a state s incentives is its past incentives 6% Comparing State Incentives in 2015 vs % 4% 3% 2% 1% 0% 0% 1% 2% 3% 4% 5% 6% 2007 Incentives 12

15 What are effects of incentives? No obvious strong effects of incentives on state growth % Real GSP Growth, % 25.00% State Growth & Incentives 20.00% 15.00% 10.00% 5.00% 0.00% 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 5.00% -5.00% % Incentives 13

16 Incentive % of Value-added What is time pattern of incentives? Front-loaded, but full incentive payout still delayed, which is economically inefficient and politically problematic 4.00% How Incentives Vary with Facility Age 3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% Facility Age in Years 14

17 Incentive % of value-added What types of incentives are most important? JCTCs & abatements 0.70% Size of Different Incentives, % 0.50% 0.40% 0.30% 0.20% 0.10% 0.00% Job creation tax credit Property tax abatement Investment tax credit R&D tax credit Customized job training 15

18 Incentive Value as % of First Year's Value Time structure of different incentives: JCTCs, abatements, & R&D have lengthy payouts; ITCs & customized training more front-loaded % How Different Incentives are Structured Over Time % 80.00% 60.00% 40.00% 20.00% 0.00% Facility Age in Years JCTC Ptax abatement ITC R&D CJT 16

19 Research on customized services Some research on customized job training find effects per dollar on job creation decisions of perhaps 10 times tax incentives: Hollenbeck (2008), Holzer et al. (1993), and Hoyt, Jepsen, and Troske (2008). Some research on manufacturing extension services find similarly high cost-effectiveness ratios: Jarmin (1998; 1999), Ehlen (2001). Why? (1) Targeted at small/medium-sized businesses, which are easier to affect; (2) Upfront, so more salient; (3) Overcoming market failures in information & education markets, so can have value greater than cost. Why don t states use more? (1) Harder to deliver; (2) Less politically visible; (3) Doesn t help larger businesses as much. 17

20 Conclusions Incentives are large relative to state budgets, not necessarily large relative to private economy. But probably some incentives large enough to have significant effect on specific location decisions. Vary a lot across states (based more on political inertia than economic need?) Don t vary enough across industries (the reverse potato chip rule?) Too long-term, not front-loaded enough Over-emphasis on tax incentives, under-emphasis on services to smaller businesses 18