McAuliffe Goal: Take a Closer Look at Incentives

Governor Terry McAuliffe as salesman in chief
Governor Terry McAuliffe as salesman in chief

by James A. Bacon

Governor Terry McAuliffe’s great gift is salesmanship. He approaches the job of Virginia’s chief economic development officer with great enthusiasm, and he loves to wheel and deal. It’s not surprising, then, that his new strategic plan, “New Virginia Economy,” calls for an increase in the Governor’s Opportunity Fund to keep it “competitive with other states.” The fund is nearly depleted after the first year of the biennial budget, and the economic-development game won’t be much fun without more incentives to dangle.

The problems with incentives are well known. First, it is unknowable whether incentives actually induce a particular company to invest in Virginia, or whether the company simply takes the money because it is there for the taking. Second, there is an inherent unfairness in taxing existing citizens and businesses in order to shower benefits to newcomers.

What’s refreshing about the strategic plan is that it does recognize the need to scrutinize state incentive programs. In particular it proposes to prioritize the allocation of state dollars by conducting Return on Investment (ROI) analysis on different incentives and programs to see which yield the biggest bang for the buck. “New Virginia Economy” mentions three specific ideas:

Evaluate current policies and study the ROI on incentives and programs. The idea of setting up an “internal working group” to review performance is a good idea. All programs should be continually scrutinized by outsiders to see if they deliver value. I would argue that scarce public funds should be channeled to programs that yield the greatest ROI and poorly performing programs should be shut down.

The fact is, administrators of the programs themselves cannot rarely be trusted to give an honest evaluation. Bureaucrats have an instinct for self preservation. They want to maintain their programs — to grow them, if possible — and can be counted on to cherry pick evidence to justify continued funding. The best counter to this all-too-human tendency is to have outsiders  ask tough questions. Private companies have elaborate systems for allocating capital within their organizations with the goal of maximizing ROI. State government needs to create comparable processes for allocating public funds.

Enhance state research capacity for conducting ROI analysis. The strategic plan only hints at what the authors have in mind, but it seems self evident that it is impossible to conduct ROI analysis without data. In the realm of economic development, that means evaluating programs in light of the number of jobs created, how well those jobs pay, the level of capital investment, the impact on the state and local tax base and other basic data. A more sophisticated level of research would look for second-order effects. Would recruiting a new business to Virginia contribute to building a competitive and self-sustaining industry cluster? Would the company create contracting opportunities for other Virginia businesses? The list of questions is endless.

Reform the Tobacco Commission. The Tobacco Indemnification and Community Development Commission was founded with high hopes that it would revitalize the economies of Southside and Southwest Virginia, beset by the erosion of tobacco cultivation and the decimation of its mill-town manufacturing economy. The Commission has been criticized for a lack of oversight, which allows powerful politicians on the Commission to reward favored constituencies. The strategic plan calls for reforming the Commission to “maximize ROI on Commission investments” and to create a long-term sustainable funding model.

If we accept the premise that state government should dispense subsidies, tax breaks and other incentives to business — I personally don’t accept that premise, but the practice isn’t going to change any time soon — then we ought to ensure that the money is spent to the great public benefit.

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10 responses to “McAuliffe Goal: Take a Closer Look at Incentives”

  1. I have a better plan.

    It works like this:

    identify the places in Virginia that are hurting economically.

    forgive ALL taxes for 10 years – local and state.

    Use the tobacco commission to reimburse the locality for lost taxes.

  2. Steve Haner Avatar
    Steve Haner

    The Tobacco Commission money would replace the lost revenue for about a week. The other 51 weeks of the year, who pays the bills?

    1. how do you know that Steve? how much money does the Tobacco Commission spend each year ?

      if you want to make it closed-ended then cap it at what the Tobacco Commission can pay for – and let applicants compete for it or make it a match grant and/or a performance grant.

      the point is – to NOT spend tax money for bribes but to use existing revenues that already go for economic development and to use it to attract companies to provide jobs.

      and if you want a revolving fund – then create that fund and fund it from post 10-year repayments or some other revenue source – but the point is to not pay outright bribes but to direct the economic development to where it is needed… and pay for it out of existing funds – currently functioning more like slush funds.

  3. The local tax would be just on real estate and now it is nothing if there is no industry on it. If a company came and employed say 200 people then those people would be spending and paying sales taxes which would dramatically produce more than lost real estate taxes from vacant property. And the state would gain through sales taxes and the multiplying effect on the local economy of having 200 people working and spending money.
    And it would be a lot better than paying a movie making company hundreds of thousands of dollars to produce a movie. I’d be willing to eliminate corporate income taxes and maybe all income taxes and bump up the sales taxes like Florida, Tennessee, Texas and others.
    And use the tobacco funds to give free tuition at communityy colleges like Tennessee does with its lottery money.
    Base changing rather than buying a turnip here and a potato there among business corporations.

    1. My proposal is to eliminate ALL taxes- real, property, sales, BPOL for 10 years for any company willing to locate in one of those zones.

      and ALL local tax loses – reimbursed from the tobacco fund.

      then I’d also add – continuing rebates based on job performance.

      we need to do what the Feds do with their grant programs where the first few years they pay all costs – then they pull back – and let the locality decide if what the Feds were funding is important enough for them to continue.

      Let’s make such an arrangement with companies.

      that’s far, far better than offering them a bribe and then having them run off later… in my view of course.

  4. Well it would be difficult to waive the sales taxes paid for the 200 new workers and that would more than compensate for the sales and income taxes waived for the corporation itself.
    And the multiplying effect of 200 new workers on the local and state economy would likely individual more than pay for the waived taxes whatever they are.
    I am in favor of eliminating income taxes and using an increased sales tax to pay the bills. And I am in favor of a national value added tax to eliminate or dramatically reduce the national taxes. Get rid of all the loop holes etc.

    1. hmm.. I was only talking about the corporation – not the workers..

      I support value-added also…

      another incentive could be – to help the company provide employer-provided by incentivizing ObamaCare … so the company would be out of the employer-provided business – a deal they might not get at another state.

      It would save them a pile of money and make them a stronger competitor against companies that are saddled with Employer-provided costs and make them more competitive against international competitors.

  5. TooManyTaxes Avatar

    How is New York’s “no taxes for ten years” program really going? What’s behind the hype?

    1. I don’t know but I think it is a far better approach than paying up-front bribes from tax revenues…

      we give tax breaks all the time to people who are not offering anything back just take the tax-cuts.

      Fredericksburg cut taxes on Wegmans over some number of years – as long as they actually produced real jobs and real tax revenues – and they did.

      you could do that with other jobs-producing businesses – give them tax-reductions if they bring jobs and perform as claimed. share the risk with them rather than paying bribes where they can collect them and then run away later.

      the problem with business now days is that business conditions can change and the company itself is bought/consolidated or competitors bet them and they close down. Walmart has put more local companies out of business than any other company on the planet…

  6. the whole idea of paying incentives is ironic because businesses are no longer permanent career-providing entities. We don’t like unions but we still want companies that provide jobs and health insurance – but those kinds of compaies are become modern-day dinosaurs.. and the only “companies” that now actually and reliably provide careers, pensions and health care – are the government. When you look out into any community – subtract out the govt jobs – and look at the largest providers of jobs – then from that list subtract the ones that don’t offer health insurance or just minimal health insurance, what do you have left in the way of private sector companies that offer jobs with career-potential and health insurance?

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