A dubious “rural jobs” tax break

A dubious “rural jobs” tax break

The Louisiana Rural Jobs Act Tax Credit Program proposed by House Bill 641 is intended to provide an economic boost to rural areas of the state. Unfortunately, the program would likely benefit a few well-connected financial firms more than Louisiana’s rural communities. It would come at a $90 million cost to the state – money Louisiana can’t afford to spend at a time when healthcare services, college scholarships and other important needs are underfunded.  

Similar tax credit programs have been implemented in 20 states over the last three decades, and there is extensive evidence that they do not live up to promises made by their supporters. The state would be better served by direct investments in rural schools, infrastructure upgrades and workforce training.

In other states, these tax credit programs funnel credits to “middle-men” investors that pledge to use them to spur private investment in rural businesses. When applying for the tax credits, the investment firms must provide an estimate of how many jobs will be created and how much state and local tax revenue will be generated. Based on audits by other states, most never come close to producing the return on investment promised. So large businesses get their tax credits and the investment firms earn interest and profits from loaning money to rural businesses, but the state and the rural areas often don’t see substantial economic growth or job creation. The Pew Charitable Trusts recently took a hard look at similar programs throughout the country:

The programs are so complex, and the promises so appealing, that states typically don’t take a close look at them until it’s too late, according to 10 economists and policy analysts who have studied them. Many critics, such as Steven Miller, senior vice president of the Nevada Policy Research Institute, call the programs “schemes.” Miller says he expects a public backlash once they “have gone belly up and taxpayer dollars have been used for private benefit.” According to Miller, supporters sell the programs to the left as a way to help the economically downtrodden, and to the right as a way to boost business. “It’s like magicians,” he said. “They are waving sparkly things so people will look at them and they won’t look at this other stuff.”

HB 641 would:

– Authorize $90 million in tax credits over three years to investment firms that provide capital to rural       businesses.

– Create a complex new funding mechanism by which state dollars go to financial intermediaries.

– Ensure little transparency or accountability to ensure the state gets a good return on investment.

 – The state would be able to “clawback” 30 percent of the amount of tax credits distributed in excess of the investment made plus the investor’s increased tax liability, if the number of jobs created is less than 60 percent of what was proposed. This means if the number of jobs created was just 10 or 15 percent of the projection, the state still would only be able to get back 30 percent of the leftover credits.  

– A 15 percent clawback provision would apply if 60 to 90 percent of the projected jobs were created.

Outcomes from other states:

– A review by the Missouri Department of Economic Development found that $120 million in state funds delivered just 823 new jobs (nearly $146,000 per job), causing the legislature to end the program.

– In New York, a state audit found that $400 million in tax credits produced a net 188 jobs (over $2.1 million per job) over the course of 15 years.

– In Arkansas, only 20 to 30 percent of the value of the tax credits were made to rural businesses.

– A March 2017 review of Florida’s tax credit program found the state received 18 cents back in tax revenue for every dollar in credits given away.

Why the programs don’t work as promised:

– They lack transparency and are incredibly complex, making them difficult to monitor.

– The structure limits competition and funnels most of the benefits to three major firms engaged in this work, typically the most vociferous lobbyists for the program.

– They rarely generate the business investment touted by lobbyists for investment firms. For example:

– A review by Maine’s flagship newspaper found the state’s program allowed one financial firm to claim $16 million in tax credits in exchange for an investment of just $8.2 million in a local textile plant.

– A 2003 state audit in Colorado found the program handed out $100 million in tax credits but only $44 million had been invested or was available for investment, causing the state to end the program.

Looking to improve the prospects of rural businesses is a laudable goal. But instead of looking to a money-losing scheme with a questionable return on investment, legislators should make direct investments in rural schools, job training, entrepreneurship and rural hospitals.

By Jeanie Donovan and Nick Albares

Sources:

Jen Fifield. In Search of Rural Jobs, States Weigh Strategy With Checkered Past. Stateline: The Pew Charitable Trusts. March 30, 2017.
Jen Fifield. How Savvy Financiers Pitch Complex Investment Programs. Stateline: The Pew Charitable Trusts. April 3, 2017.
Wesley Tharpe. Tax Break Scheme Aimed at Rural Jobs Offers Georgia a Poor Return on Investment. Georgia Budget and Policy Institute. April 18, 2017.
Whit Richardson. Payday at the Mill. Portland Press Herald. April 19, 2015.