Scrutiny grows on company tax breaks to gain jobs

The time-honored swap of millions of dollars in tax breaks for the promise of thousands of jobs is under more scrutiny as states slash spending to shore up their budgets.

Missouri lawmakers pushing for caps on state tax credits to businesses are holding up Gov. Jay Nixon's proposal to reward more companies that hire employees at a decent wage with health benefits.

"All states are now buying jobs, you have to be in it," said Missouri Sen. Brad Lager. "But we only have a handful of tax credits that have caps."

Last year Missouri spent $170 million on historic preservation tax credits, which are not capped -- slightly more than the state paid out for all of its 19 community colleges.

Ohio is banking on expanding tax breaks for companies that create or keep jobs. New Jersey wants to reward companies with $3,000 for each new employee hired.

Florida, facing a roughly $6 billion budget gap in the coming year, intends to offer loans to small businesses that show potential for expansion.

Free market vs. breaks

Tax breaks for businesses have long been controversial because some say business expansion should be spurred by the free market, not by an infusion of taxpayer money. Supporters counter that it's money well spent and nets millions more from income taxes.

States are collecting less tax revenue because of the highest U.S. unemployment in 25 years, low consumer spending and dismal home sales. Together, they face budget gaps that total $50 billion and could reach $120 billion nationwide in two years, according to an analysis from the Rockefeller Institute of Government, a think tank in Albany, N.Y.

"Given the nature of the crisis now, people are reluctant to cut economic programs if they don't have to," said Ian Pulsipher, an economic development analyst with the National Conference of State Legislatures in Denver.

States are looking at various ways to fund the proposed new incentives. Some are cutting budgets in other areas; others are eliminating other tax incentives.

The cost of new tax breaks and loans can't be calculated yet because it depends on how many companies take advantage of them and what kind of deals are reached.

Jobs for less taxes

Iowa paid out $302 million on economic development tax credits in 2007 and $180 million last year. Democrats in the state Senate now want a $175 million limit on four of the state's major job creation programs.

Minnesota Gov. Tim Paw­lenty's current plan to create jobs is centered around an estimated new state tax credits for small businesses at an estimated $50 million along with a reduction of the state's business tax rate over the next six years.

The state faces a two-year deficit of $4.6 billion and has lost nearly 86,000 jobs over the last year.

Ohio says its economic development investments have helped create 53,000 jobs and keep 195,000 since 2006.

"Not all tax credits are worthwhile but many are," said Lt. Gov. Lee Fisher, who oversaw the state's development department the last two years.

All government programs, he said, benefit from a prosperous economy and more jobs, whether it's funding for drug treatment programs or public health insurance for children.

Even though states are spending millions on tax incentives every year, the effect isn't always clear. Studies on whether they help create jobs have produced varying results.

A government audit released last fall of the $1.3 billion that Kansas spent on economic development over five years concluded that "no one can really know what would have happened without government assistance."

Questioning fairness

Critics who share that view also question the fairness of incentives that target specific companies or industries.

"Businesses can't compete with those getting money from government," said David Hansen, president of the Buckeye Institute, a think tank in Columbus that favors less government.

Better to lower taxes for everyone and leave economic development to the private sector, he said.

Tax credits and other incentives are given when companies build new plants or threaten to move their operations out of state. Some are used to lure jobs from other states; others help companies train workers.

The deals often include guarantees on the number of jobs that will be retained. Companies that break their promises can be forced to return the money.

Ohio has funded 3,600 investments in the last two years, including:

* A $24.5 million package of tax credits and loans for Findlay-based Cooper Tire & Rubber Co., which said in December it would keep its hometown plant open and close a factory in Albany, Ga.

* A $49,917 tax credit for Graeter's Manufacturing Co., which is building a new ice cream factory in Cincinnati and adding at least 30 jobs.

* A 15-year tax credit valued at $30 million for the developers of Goodyear Tire & Rubber Co.'s new headquarters in Akron in exchange for the company retaining 2,900 jobs.

"It's critical for us. In order to get Goodyear to stay, we have to put them in new facilities," said Debra Harrell, senior vice president of Industrial Realty Group, which will build the headquarters and lease it to Goodyear.

Only a handful of governors are attempting to scale back business incentives.

Wisconsin Gov. Jim Doyle wants to save $72 million by repealing tax breaks for companies that keep jobs in the U.S. But he's also backing new incentives for research and development and startup companies.

Wisconsin, like nearly every state, is facing a big deficit. Doyle is proposing new taxes on cigarettes, oil company profits and the wealthy to help solve a $5.7 billion budget shortfall.

Other states are cutting spending and government wages. Iowa lawmakers will consider a 6.5 percent spending reduction in the coming year's budget. The state has shelved plans for a $37.5 million office building.

Advocates for government workers and nonprofit groups in Iowa that could lose money under proposed budget cuts say lawmakers should look at repealing or reducing some tax breaks and business incentives instead. Adding new business tax credits isn't part of Iowa's latest budget plan.

"When money's tight and we don't have enough financial resources we need to look at creating additional revenues," said Lana Ross, executive director of the Iowa Community Action Association, which represents nonprofits that serve lower income residents.

"Everything needs to be on the table," she said. "It shouldn't be just low-income families that sacrifice."