Monday, February 17, 2014

Development tax credits are a complete waste of money

I have a new paper published in the Missouri Policy Journal (which is brand new itself) that looks at the effectiveness of the Missouri Quality Jobs Program (MQJP) on employment.  The MQJP and has been increasingly popular with economic development folks in Missouri.  The problem is that, as is typical of tax credit programs, it is more likely that it is killing jobs than creating them.  Here's the abstract
According to the Missouri Department of Economic Development (DED), the Missouri Quality Jobs Program (MQJP) will create 118 new jobs by 2020 for each $1 million dollars in tax credits awarded under the program. The claimed sources of these job gains are the direct increase in employment at the firm receiving the credits, and indirect increases at other firms due to spinoff and multiplier effects. Unfortunately, the DED’s estimates for these effects are based more on faith than on evidence. First, the DED rather naively assumes that all of the job gains at the firm receiving tax credits occur only because of the credits. Second, the DED’s projections of spinoff and multiplier effects are generated with a forecasting model that is incapable of an accurate accounting of negative substitution effects, such as the fact that many of the new jobs will be filled by people already employed locally. This paper summarizes new estimates of the employment effects of the MQJP using the actual, rather than the assumed, experience of local economies. What these estimates show is that after an initial net increase in employment following the authorization of tax credits, the net effect on employment becomes negative by the second year after authorization: Job gains in the county receiving the tax credits simply came at the expense of neighboring counties, who tended to have lost more jobs than the recipient county had gained. Finally, by the fourth year after authorization, the only statistically significant effects of the tax credits are job losses in neighboring counties.
 And the concluding line
(I)t is difficult to imagine that the trend reverses itself to result in anything close to the DED’s projection of 118 new jobs per million dollars of tax credits. The more likely best-case scenario is that the employment distortions eventually work themselves out and the net effect of the tax credits approximates zero.