By Michael Hicks
With the passage of House Bill 1020, Indiana is poised to perform a comprehensive and ongoing analysis of our state tax incentives. This comes on the heels of a broad effort by the Indiana Economic Development Corp. to become transparent and open to an evaluation of tax incentives. IEDC’s recent creation of a transparency portal and its commissioning of a study by my center to review incentives already make Indiana the most forward-thinking state on these issues.
Still, more is needed and a further review of state and local incentives is warranted. Before we get down to the business of evaluating economic development incentives, we probably ought to understand just what it means to “create a job” and how we can honestly evaluate tax incentive policies.
Over the course of a typical year, more than a half million new jobs are created by firms in Indiana through the opening of a new establishment or the expansion at an existing firm. Over the same year, perhaps a half million or so jobs are destroyed as businesses contract or close. In a good year there are more jobs created than destroyed, but in any year there is a lot of job churning.
At the state level, economic developers work with less than 5 percent of the employers of new jobs. At the local level, some economic development groups work with a higher share of employers, but rarely, if ever does it exceed 15 percent of new jobs. The simple fact is that nearly all new jobs are created without the helping hand of development officials, but this does not mean we should dismiss their efforts.
Economic development efforts are mostly targeted at footloose businesses that could choose to locate anywhere. These are typically headquarters, manufacturing and logistics firms, all of which are important employers. Still, how we count jobs from these efforts is important.
A new business relocating to or expanding in Indiana will usually predict some future job growth. Those predictions are unlikely to be exactly right. At the state level, we should not worry too much about these job predictions because the largest state development incentives are tied to actual jobs created, not predicted jobs. This is not so at the local level, where there is an incentive to “over-predict” job creation in order to secure property tax abatements or infrastructure help through a TIF. So, what should we do about it?
The success and failure of our economic development efforts should be measured simply by how much better our economy (state or local) becomes. One way to do so is to measure net job growth. Indiana’s Secretary of Commerce focuses on this job growth number, but I know of no local government that does. Such a simple approach would force local governments to weigh their economic development efforts (including abatements) against other things that really matter to growing an economy, like school performance and the quality of local parks and streets. Today they rarely do and this hurts, rather than helps, efforts to make Indiana a better place.
Michael Hicks is director of the Center for Business and Economic Research and professor of economics at Ball State University.