JLARC: Semiconductor Grants Have Not Succeeded

Incentives “spending” reviewed in recent JLARC report. Click for larger view.

The recent report from the Joint Legislative Audit and Review Commission on economic incentives related to manufacturing (here) goes far beyond a discussion of data centers, and if the General Assembly accepts it as gospel some of the existing incentives might be in jeopardy.

Two programs aimed at environmental goals should be eliminated, the staff (and by its vote the full legislative panel) concluded:  The Green Jobs Creation Tax Credit and the Green Diesel Fuel Producers Tax Credit.  Neither is being used to any extent. 

The 127-page report also says a Rosary over some highly touted grants and incentives offered to microchip manufacturers but does not recommend burial just yet.  Virginia’s early success in that arena did not continue to build, not at the same rate as the data centers.  Virginia employment in the semiconductor arena is declining now.

Manufacturing is a key part of Virginia’s economy.  The jobs pay well, factories need complex supply chains that also generate jobs and taxes, and local governments suck property tax dollars out of their manufacturing operations like vampires.  It is unfortunate that this report mingled manufacturing issues with the data centers, which are a service industry with low employment and minimal supply chains.  The data center information grabbed the headlines.

This report looks at two tax provisions important to manufacturing across the board, the single sales factor apportionment option and the property tax exemption for pollution control equipment.  And it looks in depth at how Virginia’s effort to attract semiconductor manufacturing has sputtered, despite various state incentives.  This column focuses on that industry’s incentives.

There is one useful observation that comes from reading the data center analysis and the information on the microchip industry in sequence.  The data center exemption focuses on the capital cost of building the facility and filling it with equipment.  The semiconductor industry didn’t get that.  Should that become the model for manufacturing incentives across the board?  (Translation:  The machinery and tools tax and other business property taxes are the problem.)

Virginia approved $195 million in incentives for five manufacturing facilities but paid out only $93.4 million between 1996 and 2017 (most of it before 2010).  That sector’s employment in the state has declined precipitously since 2001, at about twice the rate of decline as the nation as a whole has seen.  The international competition is winning overall, but other states are also beating out Virginia for domestic production.  Production in Virginia continues at Micron and Qimonda.

This was all as of 2017.  The report intentionally ignores the planned expansion of Micron in Prince William County fueled by another $70 million grant approval, since it is too soon to know how that works out.   Looking at the past, the JLARC staff (well, actually Weldon Cooper Center under contract) reported that the help given to Micron had more impact than the grants awarded to the other major Virginia entity, Qimonda.

“The return in revenue from both custom grants is also moderate, with Micron again yielding a higher return. The return in revenue for every $1 spent on the Micron custom grants was 97¢ annually, on average, and the return in revenue for the Qimonda custom grants was 49¢. These returns in revenue are similar to the returns (55¢) for all grants collectively per $1 dollar in total grant spending. (See Economic Incentive Grants 2018, JLARC, 2018.)”

We’ve been here before.  That 2018 report cited sparked this from me on Bacon’s Rebellion.  Nothing in this report indicates a change in methodology and citing a comparison to that report indicates it is the same methodology.  Here is a key paragraph from my report:

“In analyzing the payback on the grants and tax incentives, Weldon Cooper has added another factor seldom mentioned:  It estimated and accounted for “reduction in economic activity because of the tax increase to pay for the sales and use tax exemptions (or grants).”  This is the kind of dynamic scoring of opportunity cost that is rarely used by the state.  In fact, not everybody on the state payroll is willing to admit that raising or lowering taxes has an inverse impact on employment and gross domestic product.”

The money paid to Micron and Qimonda has been in form of post-performance grants, tied to job creation and capital investment.  For Weldon Cooper and JLARC to treat that as “spending” is legitimate.  It is not clear in this report if the 97 cents of revenue it claims the state and localities have received is the combined benefit from each $1 in grants, or an annual return on that $1.  If annual and recurring, that is a fantastic return by anybody’s standards.

The report also looks at two tax exemptions tied to that industry, which combined produced less than $9 million in tax savings over eight years.  Teasing out the impact of those versus the grant programs can’t have been easy, but JLARC credits them with creating 43 additional jobs, $7 million in state GDP and $4.3 million in annual personal income ($100,000 per job.)

Here’s an ominous note buried in the report on these provisions, perhaps a sign of things to come? “One factor likely limiting the economic benefits of the sales tax exemptions for semiconductors is that, unlike the data center exemption and many incentive grants, eligibility is not contingent on the companies achieving certain levels of job creation and capital investment.”

Everybody interested in the state’s economic development incentives and related tax policy needs to dig into this report.  If this is how a Republican-dominated JLARC views things, wait until the other team has its hands on the reins.

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16 responses to “JLARC: Semiconductor Grants Have Not Succeeded

  1. re: ” “In analyzing the payback on the grants and tax incentives, Weldon Cooper has added another factor seldom mentioned: It estimated and accounted for “reduction in economic activity because of the tax increase to pay for the sales and use tax exemptions (or grants).”

    what taxes actually increased to pay for the grants?

  2. The assumption is that if you give away $100 million in grants or tax exemptions, the taxes on everybody else goes up $100 million since government must have its money one way or the other…..a debatable premise at the very least. Then Weldon Cooper runs the economic impact of that $100 million tax “hike” and subtracts if from any benefits from the incentive program? This bears closer examination….

    • I find the JLARC assumption to be perfectly reasonable. Money can’t be two places at once. The incentives constitute what some economists call a “tax expenditure.” If you “spend” the money on tax credits for economic development, that cuts into the tax revenue you would have had available otherwise to either (a) spend on something else, or (b) give back to taxpayers. Had the money been given back to taxpayers, they would have spent it on private goods and services with a multiplier effect as the money exchanges hands over and over.

  3. Is that the same as if you increase pay to teachers by 100 million?

    Seems like virtually any expenditure by government – for any purpose – would fall into that same “logic”, no?

    Sorry to see JLARC and Weldon Cooper go down that rathole.

  4. The budget is a gigantic dynamic beast. We get more money without changing tax rates if we have a better economy and/or we gain population.

    In addition to that – some programs go away or have their funding reduced which frees up funding for other things.

    So how in the world with all these moving parts do you really show a credible impact?

    It’s just a bunch of philosophical hand-waving……….

    I’m NOT saying you can’t trying to actually calibrate something – but if you’re gonna do that – you gotta show something more than some philosophical “belief” where you just arbitrarily attribute what you “think” is the effect. That’s just bogus to the bone but it don’t keep folks from pushing it.

    In the economy – someone might spend weekly money on the lottery. Is that a better purpose that the government taking that money and putting it in a fund for long-term care for that guy when he gets old and never himself put aside money? If other taxpayers have to pay for his keep isn’t that a “tax increase” on citizens also? Yet we characterize the govt doing that as “taking money from taxpayers”, right?

    • The Weldon Cooper approach is not “philosophical handwaving”. Actually, it is an approach that many conservatives have often complained was needed. As I understand it, there is the assumption that, were it not for the incentives, those revenues would not have been needed. Thus, there was a “tax increase” needed to produce the revenues. There is a detailed description of the Weldon Cooper methodology set out, with lots of detail, in an earlier JLARC report: http://jlarc.virginia.gov/pdfs/reports/Rpt514.pdf. (page 57).

      • But Dick – you can make THAT argument about ANY expenditure – right?

        You could say , for instance, a new printer for a DEQ office ….. CAUSED a tax increase – right?

        That’s why I say this line of thinking is ideological. It boils down to the govt “taking” money to “spend” and whether or not it should – and we argue about what the spending is for……..

        a new computer printer for DEQ is “needed” but do we also agree that the incentive for Amazon is “needed”.

        It’s totally arbitrary and depends on what you think govt should spend money on – or not – ALL of this spending “causes” taxes – right?

        Now, if some fool wants to be uber consistent and argue that DEQ should not get their new printer because it will “cause” a tax increase then have at it – I’m not buying it and that kind of talk is just fouling the air with fetid smells…that have no real good purpose other than to just make a stink in general about govt and taxes.

      • I just don’t think organizations like Weldon Cooper or JLARC or APC should reflect a particular political ideology in their analyses and reports.

        Their work product should be the SAME – no matter whether the Dems have control or the GOP has control.

        Otherwise – the become co-opted by whoever happens to be in control at at any time and a report on the SAME subject comes out DIFFERENT depending on whether there were liberals in charge or Conservatives.

        OKay so when this happens it UNDERMINES their CREDIBILITY because they have stepped beyond basic facts and into political interpretation and at that point – I can no longer rely on them for the unvarnished truth.

        Both WC and JLARC should be more like APC in this regard – i.e. “just the facts ma’am”. When/if I see this kind of political ideological stuff start to creep into APCs work product, I’m not going to be happy.

        The money facts are NOT “the policy”. We can and should argue about POLICY but NOT in the context of presenting basic financial facts.

  5. I agree with Jim. There is agreement among state financial analysts regarding the concept of “tax expenditures”. There are two basic ways of providing financial economic incentives–tax breaks (exemptions, credits, reductions, etc.) and outright appropriations (grants, infrastructure improvement, etc.). Both methods are policy decisions on how to use potential revenues. Treating both as “spending” for the purposes of analysis ensures that all amounts are accounted for consistently. There is no liberal bias or conspiracy here.

  6. I’m not objecting to calling them “spending” at all nor am I saying it is a “conspiracy” ( not my thing at all) , BUT I AM saying that the viewpoint about saying ANY increase in a budget item amount will result in a specific tax increase is simply not literally true – it’s a simplistic concept that is NOT how the budget process actually works but Conservative types like to promote the idea than any spending literally causes tax increases – and that typically comes from folks with certain ideological perspectives.

    If a particular item for spending in the budget has been there awhile – like for instance, an allocation for ED credits – then it’s just a built-in spending item that does not increase the budget from the prior year.

    And it works that way whether it’s spending for schools or police or a tax expenditure for ED. All those things “spend” tax revenues but NONE of them are tied to specific taxes – as far as I know – they’re all “general fund” – if not – educate me.

    But if someone claims you cannot put money towards spending for a tax credit/incentive without raising taxes elsewhere – it’s no different either for spending for police or education, etc and the budget process does not produce tax increases for specific taxes as a direct consequence of allocating more money for an existing budget item or a new item – unless the spending item actually is funded from a specific earmarked tax.

    Otherwise – the budget process is a big swirling sausage-making exercise when one item might get cut to fund another or tax revenues – not the tax rate – the revenues coming in are higher than last year because of a better economy or more population, etc… but there is no way to show a direct link between a general budget item and a specific tax – that’s just a concept – and the actual budget is not processed on an item of spending verses a particular tax rate.

    Conservatives typically claim that if the government takes in more money on general taxes than the prior year that they should rebate it and not spend it – that’s it’s not theirs to spend – it belongs to taxpayers.

    I GET THAT – but that’s NOT how the budget process “works” – again as far as I know – and you do and can correct me if I’m wrong.

    So – bottom line for ED spending which IS classified as a tax expenditure because not money for a specific budget item – say like Police car fuel…. or tires or teacher pensions, etc.

    ED money – is not even like other tax credits which are essentially rebates for particular things like renovating a historic structure or building a solar farm.

    ALL of these things DO take tax money – no question – but as far I know there is no one-to-one linkage and that linkage is embedded in the budget process such that we know precisely what taxes are associated with ED incentives and if we were to INCREASE ED money it WOULD cause a direct increase in the tax rate or in a specific earmarked tax.

    So a GOOD example of where that DID happen – is the hospital provider tax to cover the 10% associated with the MedicAid Expansion. In that case – there was indeed a direct tax increase but even then – it may not result in a higher cost to anyone because (for instance) increased insurance coverage may result is less bills not paid and written off by the hospital or they may find other savings/productivity in their own operation to squeeze to not have to increase their prices.

    The thing about all of this is that there are lots of moving parts and the idea that for every spending there is a tax increase is an ideological concept not a real thing that someone can actually specifically point to in a budget ………….

    yes on a maco basis – increased taxes COST someone more but again – it may be something like paying a higher tax – they may be helping to buy one more deputy in their county and perhaps not buying as many lottery tickets or getting as fancy a new fridge they might have, etc…

    Does that guy need a new deputy MORE than he needs the latest gizmo on his lawn tractor? The part that rubs Conservatives the wrong way – is that they feel that the guy paying the tax should be able to decide what to do with “HIS” money – not the govt – that when the govt takes his money – the govt is deciding what is best and takes his money rather than let him decide.

    I GET that concept – but it’s an ideological concept much more than it is something someone can actually follow on a one-to-one basis.

    It’s really about the whole concept of govt , taxes and spending and how one views that issue – philosophically.

    THAT’s why I say the issue about ED tax incentives is just another generic stalking horse/proxy for conservative types thinking about taxes and spending. We HAVE TO TAX AND SPEND for basic govt services like Police – is that spending taking money out of people’s pockets ? YES. Do we not do it because we should not be taking money out of people’s pockets for Police? NO! Perhaps that is a “Liberal” concept, eh?

  7. I’m not even going to try to engage after that many long comments…but this is a topic I’ll explore later. My big problem with this kind of “government opportunity cost” thinking it is always seems to run one way and not the other, and always starts with the premise that the money is due the government, which decides whether or not to take it all……

    • I just think representing any expenditure as a tax that takes money out of a citizens pocket that govt should not be taking – as more ideology than an objective discussion of the necessity of government – as well as taxes for services and infrastructure.

      Yes – taxes always seem to go up and not down – but characterizing taxation as general evil to always be rebutted is not a reasonable discussion either.

      It leads to things like people wanting more roads but not wanting to pay more taxes or tolls… that’s where that kind of thinking leads to.

      • Larry, I understand your general point. I think I tend to agree with you. This aspect of the Weldon Cooper analysis, which is incorporated in a model they use, was unknown to me until I started looking at the JLARC reports. I don’t know how big an influence it is in their analysis. I know someone at Weldon Cooper and I will try to dig into it some.

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  9. Fascinating. I seem to remember the RIC microchip manufacturing craze to be a driving force behind the genesis of the VCU college of engineering. How has that worked out? Have the electrical and computer engineering departments remained engaged with the chip manufacturers? Or did they go their separate ways after the honeymoon period?

    • Remember that chip design and chip fabrication are almost always done separately. Many companies that design chips contract out the fabrication to other companies. If VCU was teaching chip design I think it would be a good investment.

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