Competing visions, unclear prospects

Economists say evidence mixed on lure of incentives

By Robert Gavin, Globe Staff, 9/17/2003

The Romney administration's proposal to hand millions of dollars to companies that create manufacturing jobs in biotechnology and medical devices is renewing a long-running debate over whether such incentives work and, more broadly, if states, given their limited resources, should be in the economic stimulus business at all. The evidence on incentives is mixed, according to economists, with some studies showing that tax breaks and other financial sweeteners can mean new jobs -- and even new industries -- for states, while others show that incentives play only a small role in companies' decisions to locate, expand or create jobs in state. Ultimately, say economists, incentives on the scale proposed in Governor Mitt Romney's $125 million package are a political, rather than economic, tool.

"There is huge pressure on politicians to look like they're doing something, and what it all boils down to is [the Romney plan] is motivated more by political than economic considerations," said David Tuerck, an economist and the executive director of the Beacon Hill Institute at Suffolk University, a conservative think tank. "It won't cost a lot of money, but it won't create a lot of jobs."

In general, economists said, states can have very little influence on the direction of their economies, which move with the tides of much bigger national and global economies. While tens of billions of dollars in federal tax cuts can provide stimulus to a sagging economy, states just don't have enough money to make much of a difference in the $10 trillion US economy.

And, economists added, if states indeed want to try to boost their economies, they would probably be better off passing across-the-board tax cuts as opposed to targeted ones, which have their impact blunted by costs incurred by businesses that apply for them, and by the state in administering them.

"Any tax incentive is a distortion and inefficient, and the most efficient thing is to cut taxes across the board," said Michael Luger, the director of the University of North Carolina-Chapel Hill Office of Economic Development, who has studied the cost and effects of tax breaks in North Carolina. But, Luger added, sometimes such distortions created by tax breaks are desired, such as for helping poor areas, and "that's a matter for policy makers, not economists."

The Romney administration's economic proposal follows by two months a $110 million proposal of House Speaker Thomas M. Finneran, passed by the House and now under review of the Senate. The size and goals of the competing plans are similar, with both seeking to boost the cutting-edge technology companies that drive the state's economic growth.

The approaches, however, are different. The Finneran plan, financed with a one-time infusion of tobacco settlement money, would use grants and loans to provide up-front help to a broad range of technology companies when they expand here. The governor's plan, which would spend the money over three years, includes work force training and incentives aimed a lowering the cost of housing and would provide tax relief to biotechnology, life sciences, and medical device companies after they create jobs.

Under the governor's plan, companies that add more than 25 manufacturing jobs in these industries would get back half the income taxes paid by the new employees, at a cost to the state of about $10 million over three years.

The proposal appears a departure for the Romney administration, which earlier criticized the Finneran incentives as putting the state in the business best left to venture capitalists: picking companies in which to invest.

Robert Pozen, Romney's chief of commerce and labor and top economic adviser, had conceded in an interview several months ago that there was little the state could do to boost its economy in the face of the national economic downturn, and its efforts were best directed keeping taxes stable and the business climate certain.

Yesterday, Pozen said the governor's proposal was consistent with those statements. The incentives, he said, are carefully targeted at industries in which Massachusetts has a competitive advantage, and are aimed at ensuring that these companies, which are moving from the development of products into early stages of manufacturing, will grow here. He added that the plan is a pilot program that would be expanded to other industries should it prove successful. Joseph Cortright, a Portland, Ore., economist who has studied the biotechnology industry, said such incentives can work in states like Massachusetts, which already have developed thriving biotech clusters, although it's unlikely they would work in places that are trying to build an industry from scratch.Still, economists said, it's difficult to tell whether tax incentives are creating jobs, or whether companies would have located there anyway. In North Carolina, considered a rival of this state's biotech industry, a survey of businesses by the state Commerce Department found that only 30 percent of the companies surveyed said incentives played a role in their decision to expand in North Carolina. Luger, the UNC professor who studied the state's incentive programs, estimated that only 4 to 10 percent of the new jobs claimed by North Carolina businesses were attributed to the incentives.

On the flip side, Alabama's liberal use of tax incentives has been viewed as successful and have made the state a new center of automobile manufacturing, making it home to Mercedes, Honda, and soon-to-be Hyundai plants. The Mercedes plant alone is estimated to have generated some 10,000 jobs in the state, from the plant, to its suppliers and other businesses that service them.

These different results make incentive programs a difficult choice for state leaders. "You're damned if you do, damned if you don't," said Alan Clayton-Matthews, a professor of public policy at the University of Massachusetts in Boston. "If you don't you might lose jobs, and if you do, the incentive might be going to companies that would have located here anyway."

Robert Gavin can be reached at rgavin@globe.com.