Tax Incentives to Outside Businesses Never the Key to Economic Growth

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The Legislature wrapped up most of its work last week, including driving the final nail in the coffin of Governor LePage’s so-called “Open for Business Zones.” This was the right result for Maine businesses and Maine workers. There is no doubt that Maine faces economic challenges right now, but we cannot lose focus on balancing the needs of both growing the economic pie AND valuing how that pie is shared. Like most race-to-the-bottom approaches, LePage’s plan featured steep tax incentives designed to lure large companies to Maine, while at the same time silencing the voices of employees who might work for that company.

The latter issue, also known as “right-to-work,” has been thoroughly debated since the Administration tried to implement it on a statewide basis during LePage’s first two years. Even in a GOP controlled Legislature it was defeated soundly. Fortunately , the Legislature saw through this current back-door attempt to impose “right-to-work” in limited areas and soundly defeated this bill, too.

As interesting, to my eye, was an analysis in the Portland Press Herald over the weekend of the other pillar of the “Open for Business Zones” approach: massive tax incentives. For about 10 years, Maine has operated “Pine Tree Development Zones” that offer companies in certain sectors a roster of tax incentives in exchange for job creation commitments. According to DECD, the program has certified around 400 participants, who have created about 10,000 jobs. Sounds good, right? Certainly for those 10,000 people it has been good. But, as a policy for the whole state, at a time that public dollars are so precious, does the benefit outweigh the cost?

Maybe not. According to the study reported on by the PPH, the program delivered $358 million in direct benefit to the state, but cost $457 million to implement. Here’s the key takeaway:

Economists and academics who study corporate incentives, however, disagree that inducements significantly affect business decisions.

“States have been involved in incentive competition for 50 years. Dozens of studies have been done with somewhat varying results. There is very little reason to think these programs will have much impact,” said Peter Enrich, a professor of law at Northeastern University’s School of Law, who specializes in state and local tax policy and state and local government law.

“Normally, there is very little evidence that business decisions are made based on incentives. Businesses decide where they’re going and then get the states to compete on the final bonus details. People are inclined to think that businesses are going to move because of an incentive and it’s not true,” Enrich said.

Of course, this doesn’t conform with conservative, pro-corporate ideology, so it will be interesting to see if the LePage Administration does any deep-thinking about their approach. For the rest of us, though, we have been given some further guidance:

A 2011 report by the Brookings Institution said that 95 percent of all job gains annually in a typical state come from within as existing business expansions and new business launchings – not from companies relocating from another state.

The lesson here is that attacking the rights of workers and rolling out a very expensive red carpet to out-of-state entities is not the best way to grow the economy in Maine. Instead, we need better incentivization of Maine-based entrepreneurship and more support for successful businesses that are here already. If we do that, both employers and employees will see a far greater benefit than if we keep chasing the false promise of major business relocations.

About the author: Ben Grant is an attorney at the workers’ rights law firm McTeague Higbee.

Maine at Work

About Maine at Work

The partners at McTeague Higbee protect workers' rights across the state of Maine. With experience in both state and federal courts including national litigation, they have particular prominence in asbestos litigation, labor and employment litigation, workers' compensation, construction accidents, Social Security Disability, and personal injury. They use this blog to educate Mainers about their workers' and individual rights in a number of different legal matters. For more information, go to www.mcteaguehigbee.com.