Cushing Overstates Effectiveness of Right to Work and Tax Incentives

IN an op-ed piece published today, Sen. Andre Cushing overstates the effectiveness of right to work legislation and tax incentives in generating economic growth and employment.  He writes:

The bill’s goal: provide a number of proven incentives to entice large companies as other states have done. Among them:

Eligibility for corporate income tax credits, sales tax exemptions and reimbursement of state withholding taxes.

Reimbursements for electricity costs that exceed the national average.

Greater access to capital through the Finance Authority of Maine.

Employees in the “Open for Business Zones” would not have been required to join a labor union, but the companies would have had to meet prevailing wages in the region to qualify for the credits. This would have addressed concerns raised about the program offering only low-paying jobs.

As for right to work:

Consider Indiana. Since enacting a right-to-work law two years ago, it has attracted 64 new companies, bringing in 8,000 new jobs and $2.5 billion in capital investment. An Indiana Economic Development Corp. official said right-to-work wasn’t the sole factor in bringing in those companies, but company executives the agency spoke with said they wouldn’t have considered Indiana without it.

These tax incentives, also known as enterprise zones and developed in the 1970s, have been studied extensively, and their effectiveness is  is not nearly as clear cut as Cushing suggests.  For instance, in reviewing California’s tax incentives program, economiss Jed Kolko and David Neumark concluded:

The evidence indicates that enterprise zones do not increase employment. We also find no shift of employment toward the lower-wage workers targeted by enterprise zone incentives. We conclude that the program is ineffective in achieving its primary goals.

Similarly, Joel Elvery examined tax incentive programs in California and Florida, and found that:

The results suggest that enterprise zones of California and Florida had at best no effect on employment and at worst a small negative effect in Florida, but the estimates are not significantly different from zero.

From Daniele Bondonio and John Engberg:

The results show that the EZ programs do not have a significant impact on local employment. Program impact does not depend on the monetary amount of the incentives and or on specific features of program design.

And from Deidre Oakley and Hui-Shien Tsao’s 2006 paper examining national level tax incentive programs:

Traditional economic development programs received the most emphasis but this did not translate into positive socioeconomic outcomes. With the exception of a few isolated incidences where individual zones fared better than comparison areas, zone initiatives had little impact.

Not all research on tax incentive programs is negative.  However, the positive results are not as robust as Cushing suggests, and, more importantly, the research showing positive results still casts doubts on the effectiveness of these programs.

First is whether the economic activity is the direct result of the tax incentive programs.  As Colin Gordon wrote in 2008 when researching the effectiveness of tax incentive programs in Iowa:

What we don’t know, and what no business eligible for public subsidy is likely to admit, is what portion of new investment or new jobs can actually be credited to public subsidies.  “Such questions cannot be answered directly,” the Iowa Department of Revenue concluded in a recent report, “because it is not possible to know how businesses would have behaved without the credit.”

Others note that while the tax incentive programs might be a factor in a business’s decision to locate to a state, it is not the primary driver.  Again from Gordon:

When comparing alternative locations, differences in state and local taxes and incentives will generally be trumped by differences in other costs of doing business and other locational factors, including the availability of labor with appropriate skills, access to suppliers and markets, wages, and energy costs.

Moreover, although tax incentive programs are often targeted in impovershed areas with higher levels of unemployment, research suggests that most positive results occur when those programs are targeted in already economically stable or well-off areas.  From the House Research Department for the Minnesota Legislature:

Overall, a consensus appears to be forming that tax incentives have negligible to small positive effects upon the state economy. Some research finds certain pre-existing regional conditions set the stage for economically successful tax incentive programs, including areas with low unemployment rates, high levels of investment, and suburban regions.

Alan Peters and Peter Fisher, who have done extensive research on the issue of tax incentive programs, also note that the success of tax incentive programs often is influenced by pre-exisitng economic conditions:

Why do enterprise zones perform so poorly? . . .[E]nterprise zones are typically in areas with poor infrastructure, poor connections to the transportation system, high crime, and so on.

Some other problems with these programs are where the tax credits are greater for capital investments rather than labor, resulting in a negligible impact on employment, and, of course, the cost to state coffers.  Peters and Fisher examined 75 various programs and found that each job created resulted in a $59,000 loss to state and local revenues.  These costs vary greatly, and the cost to revenues can be off-set by reductions in unemployment and strains on state and local welfare systems.  But the figure arrived at by Peters and Fisher highlights how costly these programs can be.

Lastly, and without delving into the larger issue of right to work, Cushing’s presentation of Indiana as a evidence that right to work is the primary driver of economic and employment growth is, again, overstated.  From the trough of the recession through early 2012, when right to work was enacted in Indiana, the state was adding jobs at a rate higher than or similar to the growth rate of jobs post-right to work in both the overall economy and in the manufacturing sector specifically (a sector in Maine Cushing tacitly implies would benefit from right to work legislation):

This is in no way to suggest that right to work has slowed down the growth rate, nor that the growth rate would have continued had right to work not been enacted.  Rather, it’s to give context on the Indiana labor market both before and after enactment of right to work.

The impact of right to work on the manufacturing industry in Indiana is not so clear cut, and the effectiveness of tax incentive programs is not as conclusive as Cushing suggests.

John Haskell

About John Haskell

John graduated from the University of Southern Maine with a degree in Political Science, and from the University of Maine School of Law. He has worked in both the public and private sectors, and currently, works with a small business services company in the Mid-Coast area.