Tax Analysts Blog

Admit It -- This Tax Incentive Program Failed

Posted on Jul 27, 2016

Public finance experts have said for years that tax incentives generally don't work, and tax incentives aimed at getting companies to invest in particular places rarely work. Businesses make investment decisions based on several criteria. Taxes play a role, but they are hardly the most important factor. The two key determinants of business investment are access to markets and labor costs. The former entails the ability to acquire materials and supplies and to get products to customers in a cost-efficient manner. Examples of this need are legion. For the latter, a business simply wants to hire the right kind of employee at the lowest possible cost. Other factors play a role, of course, such as where executives live and the cachet of being in a particular locale. Taxes matter, but not nearly as much as politicians think they do. In the long run, low taxes and a business-friendly regulatory climate will attract business investment, but taxes matter much less for discrete business investment decisions.

Start-Up New York is a prime example of a tax incentive program that did not and will not work. The state recently disclosed that the much-heralded incentive program spent $53 million in its first two years of operation. The program is said to have attracted 159 companies and created 408 jobs, but how many jobs were actually created remains unclear. It's possible that some or all of those jobs would have been created without the ridiculously generous tax breaks. But even if we assume a causal relationship, Start-Up New York spent nearly $130,000 per job. Actually, the people of New York spent $130,000 per job. Under what definition can this be considered a success?

Democratic Gov. Andrew Cuomo's administration and Empire State Development Corp., the agency that administers the program, were embarrassed by the results. The report was released late July 1, just before the long holiday weekend. You don't have to work for a public relations firm on Madison Avenue to know that the administration was trying to bury the news.

And let's be clear. The $53 million is only the amount the state spent on advertising and marketing Start-Up New York; it does not include the dollar figures for the tax incentives. New York has been buying television ads across the country, encouraging businesses to invest in the state and take advantage of the generous tax breaks. Those tax breaks include complete income, sales, and property tax exemptions for the business, as well as income tax exemptions for most employees. The exemptions last up to 10 years. From a budget standpoint, it's good that more companies with more employees haven't signed up. As Greg LeRoy of Good Jobs First noted in our coverage: "The program will always fail to create many jobs but continue to cost a lot of money." Basically, the state is giving money to companies to do what they would have done anyway -- and it will keep giving them money for the next decade. 

Start-Up New York has not and will not attract the kind of investment envisioned by Cuomo and his supporters. I believe that all tax incentives are unsound, but at least states like Alabama can point to Mercedes-Benz and argue that the development policies directly and indirectly created tens of thousands of jobs. I have criticized Tesla Motors Inc.'s Nevada tax incentive deal as unnecessary -- because it was -- but Tesla will have a significant effect on the state's economy. The Cuomo administration has little to show for Start-Up New York.

From the beginning, Start-Up New York was a bad idea. It was the epitome of government messing with the markets. Your business had to be "approved" by politically appointed officials before you could get the tax benefits. Some industries and businesses are in; some are out. It takes a certain level of arrogance to make that determination in the face of what markets may want. And you have to invest in one of the zones created by the Cuomo administration. If you're in the zone, you get the tax benefits. If you're outside the zone -- even if only by a few feet -- you don't. What makes sense from an economic perspective doesn't really matter. Of course, like all incentives, Start-Up New York has an equity problem. What does the state tell businesses that invested in the zones before the program? "You should have waited"? Indeed, what does it tell the thousands of businesses now operating throughout the state? They, and their employees, are all paying the full freight. The zones are all near state universities. The people who cut the grass and clean the restrooms at the universities will pay tax on their income. The executives in the handful of companies enjoying the tax breaks won't. There is no justice or fairness in that outcome.

People often say that government should not be picking winners and losers in the marketplace. It's true. New York politicians should take that advice. It just might save the state some money.

Read Comments (2)

Edmund DantesJul 27, 2016

I agree with you completely that targeted tax incentives are very bad policy, and that they don't generally work as promised.

But the overall tax environment plays a larger role than you give it credit for, I believe.

I heard this story years ago. United Tech had to decide which of two plants to close, one in CT or one in the south. The employees in CT were paid substantially more, but that was justified by their higher efficiency. However, CT's very high taxes drive us to have the highest utility costs and medical costs and housing costs in the country, the highest cost of living in general. Despite their high pay, the CT employees felt they were barely keeping their heads above water. They were not happy. The employees in the south were far more satisfied, despite their lower compensation. That factor proved decisive. I was told that the labor cost per unit of output was essentially a wash, so UTC was not trying to drive down labor costs. But they knew they could never pay CT employees enough to make them happy.

This was years before GE decamped to Massachusetts for largely similar reasons. CT politicians never got the message.

Mike55Jul 29, 2016

"The two key determinants of business investment are access to markets and labor costs."

Of course, no sane person would try to dispute this. But most relocation studies identify at least a couple of places where the non-tax factors are a push, which is precisely the situation a well designed incentives program targets. For example, you'd be very hard pressed to argue that Northern Virginia has not benefitted from its use of incentives to pry federal contractors away from Southern Maryland over the past 20 years.

The Start-Up NY program is silly of course..... it reeks of the influence of the sort of policy wonk who believes a high IQ sufficient to offset any lack of direct experience. Or perhaps pollsters more concerned with sound bites than creating jobs. Either way, the program makes nearly every foot fault imaginable, almost as though the architects sought to craft an example of what NOT to do. To name a few errors: (1) it's way too broad in focus (tech, life sciences, food & beverage, clean energy, optics, advanced manf., and trans. equip.); (2) it has no correlation to New York's economic strengths (finance, investment, HQ hub); (3) it provides the bulk of its "benefits" in a form businesses will heavily discount, if not ignore outright (no taxes for employees, long tail); (4) it requires businesses to partner with unrelated institutions certain to have different motivations/objectives (colleges); (5) it requires businesses to locate in places they otherwise would not (on/near college campuses); and (6) it's underlying premise appears to be based upon a comical misinterpretation of the economic literature around development of innovation centers (the many studies explaining the rise of places like Silicon Valley appear to have been distilled down into "try to force smart people work near each other").

So Start-Up NY is pretty terrible, but not proof incentives don't work. It's instead a cautionary tale of why states need to a good job of designing their incentives. If anything, Start-Up NY should result in MORE incentives spending: New Jersey and Connecticut should be seeing blood in the water, and seek to rob their neighbor of a bit of its commerce.

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