Mississippi and 28 other states are making no effort to determine the true returns their states are gaining from tax incentives granted businesses in exchange for promises of jobs and capital investments.
So says the Pew Center on the States in a new study that categorizes the 29 states as those “trailing behind.” It puts 12 states in the “mixed results” category and 10 — among them Washington, Oregon, Arizona and Iowa — as ‘leading the way.”
The Mississippi Development Authority questions the depth of research the Pew Center on the States did in deciding Mississippi’s ranking for the report, but the Center insists it made a thorough review of the state’s policies on monitoring the effectiveness of tax incentives.
“We went beyond evaluations that report only numbers,” said Bob Zahradnik, the Center’s director of research, in an interview last week.
He added, “We started the study by asking, ‘Do your state policymakers have evidence you need that tax incentives are delivering a strong return?’”
The shortcoming of Mississippi, Tennessee, Alabama, Georgia, Florida, South Carolina and the other states that make up the 29 “trailing” states is an absence of mechanisms to ensure the tax incentives “inform public policy,” Zahradnik added.
A key question that the trailing states have not asked, he said, is whether the job creation would have happened without the incentives. “Did the incentives really make a difference? Were the jobs created new jobs or simply displacing other jobs?”
A conservative estimate, according to the Pew Center on the States, is that states provide the private sector $9 billion a year in tax incentives.
Mississippi’s incentives consist of exemptions, credits and rebates. They are listed and detailed in a 116-page report by the Department of Revenue titled “Mississippi Tax Incentives, Exemptions and Credits” effective as of October 2011.
The Pew Center’s Zahradnik acknowledged the squeeze state policymakers are in when it comes to economic development. If their state stays on the sidelines, their performance could be measured as ineffective in creating jobs. Oftentimes, this leads to an ad hoc approach, the chief researcher said.
But effectively evaluating what you are doing can often provide a blueprint for improvement, the Pew Center on the States study noted.
“A lot of states haven’t put a policy in place,” Zahradnik said.
The top rank states do, however. Oregon, for instance, sunsets its tax credits every six years and renews only the ones that have been deemed a genuine value to the state’s taxpayers and overall economy.
Washington State, also ranked as a leader, holds annual legislative hearings on the credits and does evaluations as part of that process. “Iowa and Arizona have set up systems that put the evaluations in front of lawmakers,” Zahradnik said.
The study noted that Louisiana, which received a mid ranking, attributed more than 9,000 new jobs to its Enterprise Zone program. But, according to the Pew study, a more rigorous evaluation a few months later by the state’s economic development agency led to the discovery the program had produced only 3,000 net new jobs.
In 2010, Missouri Gov. Jay Nixon created a Tax Credit Review Commission made up of 27 business, community and legislative leaders to do a critical analysis. The examination was aimed at ensuring taxpayers receive the greatest possible return on investment from tax credit programs and that the programs are used efficiently and effectively. The commission recommended eliminating or not reauthorizing 28 tax credits, according to the Pew study.
Sixteen states, among them Mississippi, Alabama and Tennessee, did not publish a document between 2007 and 2011 that evaluated the effectiveness of tax incentives, the study said.
Zahradnik said he is puzzled at the absence of any desire to scrutinize incentives. Politicians, he noted, often speak of running governments as they would a business. Evaluating tax credits gives them a chance to do exactly that, he added.
Mississippi customizes its incentives
State officials who have read the Pew Center on the States study say the Center’s researchers overlooked some unique aspects of Mississippi’s slate of tax incentives. Mississippi, for instance, tailors each incentives package to what works for both the business receiving them and the state, said Dan Turner, communications director for the Mississippi Development Authority.
“We don’t have a standard song sheet to go by,” he said. “Virtually all of them are tailor made.”
The MDA, Turner said, measures what the company is looking for and comes up with ways to entice it to come to the state for a long-term relationship.
“We’re not going down a menu and checking off items,” Turner said. “The thing Mississippi has done pretty consistently is: ‘Tell us what you need and let’s see what we can put on the table for you.’”
In The Magnolia State, success is measured in whether you landed the industry you pursued, he said. “Expanding jobs, expanding the economy — that’s the way we see our mission. There are obviously a lot of different ways to approach it.
“The biggest and most obvious way to tell if your successful is, Did you land that industry?”
The MDA does go back five to six years to evaluate what worked and what didn’t and changes its proposals accordingly, Turner added.
The other factor in evaluating tax incentives is that the tax returns of the companies receiving the incentives are off limits, he noted. “We don’t know if, by the Pew definition, we have an effective way to analyze that or not.”
Turner charged that the Pew researchers based their conclusions about Mississippi on a single study done by the Institutes for Higher Learning. “It’s difficult to assign much weight or credence” to a report “that relies on one document or study.”
He said Pew neglected to contact the MDA.
Not true, said Zahradnik. Kathy Gelston, CFO of the MDA, was among state officials Pew researchers interviewed, he said.
He added researchers also interviewed Ashley May, director of the Department of Revenue’s Office of Tax Policy and Economic Development, and Max Arinder, chief of planning and support for the Legislature’s Joint Committee of Performance Evaluation and Expenditure Review.
Documents reviewed in the Mississippi assessment included the annual tax expenditure report produced by the Center for Policy and Planning. Researchers also reviewed the web sites of state agencies, Zahradnik said.
Ultimately, the research on Mississippi failed to “find anything for measuring the economic impact or drawing clear conclusions on the economic benefits” of state tax incentives, he said.
Senior economist Bob Neal’s job at the Institutes of Higher Learning is to analyze incentives the MDA is preparing to offer a business prospect. He said he looks to ensure the state is not providing more incentives than the economic activity the new business is providing.
“I do an initial run on the project absent any incentives,” Neal said. Next, he adds up the incentives based on what they are expected to cost the state.
He said his work often involves bond issues that provide funds to qualified economic development projects. His research on that front has shown the MDA “has done a pretty good job making sure it is not giving away the farm,” he said.
Neal said his initial read of the Pew report disturbed him. “It sounded like they were unfairly indicting the model we were using.
“On a second read I realized they were not actually indicting the analysis” but “were looking at the benefits to the states — not the costs.”
The economist noted that professionals in his field have a range of views on economic development incentives, including some who believe government has no business providing any of them. These purists, he said, think that in place of incentives states should simply make themselves more broadly business friendly.
A key test Neal applies is whether the business seeking the incentives is going to generate real economic activity and not merely be the consequence of it. “You don’t get rich taking in your own laundry,” he said.
You can come out ahead, Neal added, “if you keep the incentives reasonable for a short duration and be in Mississippi and operating with the workforce they promise for a sufficient period of time.”
Informed policy setter
In further explaining the Pew study’s mission, Zahradnik stressed that Center did not undertake the study to judge the worthiness of tax incentives. Nor was it meant to question the effectiveness of economic development officials in Mississippi and elsewhere, he said.
“Our report is focused on policymakers. They should need this information to make decisions on whether these incentives are working. They need to take the lead in requesting this information. They are the ones that are accountable.”