Section 1. Introduction
Tax incentives have recently endured public scrutiny as a tool for economic growth. In 2017, Amazon announced its plans to open a second headquarters, invest $5 billion, and create 50,000 high-paying jobs at a location that can provide sufficient inducements. Larry Hogan, the governor of Maryland, touted Amazon HQ2 as “… the single greatest economic development opportunity in a generation.”
Across the country, 238 cities and localities including Maryland, Virginia, and the District of Columbia submitted bids offering billions in tax incentives. The District offered a standard tax incentive package, which was, at the time, offered to all high technology companies and could have been worth somewhere between $0.5 billion to $1 billion; Maryland offered the largest incentive package in the nation amounting to $8.5 billion; the Commonwealth of Virginia offered $573 million in performance-based incentives. All three jurisdictions qualified as finalists but ultimately, Amazon chose Virginia’s National Landing site.
Good Jobs First, a non-partisan organization that tracks state and local tax incentives (along with other subsidies), reports that Amazon and its subsidiaries have received nearly $3 billion in incentives for its warehouses, data centers, and film productions.
Tax incentives are very common
Because of its massive scale, the Amazon HQ2 bid is one of the most well-known examples of states using substantial tax incentives to lure relocating companies. But it is just one such instance among thousands.
In the last two decades, incentive amounts paid have tripled, adding up to $50 billion in state budgets annually. To compare, in 2018, all state and local government combined collected $56 billion in corporate income taxes.
States, faced with large budget shortfalls, have come under tremendous pressure to create jobs and strengthen their economies and have turned to business incentives as a policy tool. Today, virtually every state has at least one type of tax-incentive program in place to influence firm expansion, relocation, and startup decisions. Yet, the effectiveness of incentives remains highly disputed. Critics question the government’s ability to pick the right winners and dismiss incentives as a wasteful redistribution of taxpayers’ money to large businesses. Those who favor incentives argue that targeting expansion and relocation of large firms is the best use of public resources. The justification is that large firms are not only the most productive and able to create high-paying jobs, but that over time, they also generate higher tax revenues for local governments.
One major analysis on incentives in the United States, conducted in 2012 by the Pew Center on the States, finds that at least half of states included in the study have introduced incentives without conducting rigorous program evaluations for accountability. Thirteen states (characterized as “Leading the way” in the report) were using program evaluations to measure the effectiveness of state business incentives. Twelve states (“Mixed results”) had mixed results and the other 25 states, including Washington, D.C., (“Trailing behind”) lacked evaluation criteria to measure scope or quality of incentives. However, according the study, “No state regularly and rigorously tests whether [their incentives] are working and ensures lawmakers consider this information when deciding whether to use them, how much to spend, and who should get them.”
Until recently, rigorous program evaluations were sparse among researchers and state agencies due to lack of available data and methodological issues, despite being necessary to inform lawmakers and improve policy choices. While Pew Charitable Trusts notes in a follow up study that 27 states and the District of Columbia have made progress in gathering evidence on the outcomes of tax incentives, additional research and evaluation can strengthen policy decisions. When properly reviewed and the key results integrated into policy deliberations, tax incentives can be an effective engine of job growth in the short-term, but more importantly, of economic growth in the long-term.
States – even those that share a border – have adopted vastly different incentive-granting strategies.
Some of key differences include what type of incentives are offered, how much are offered, and what sectors are targeted. In this sense, incentives provide a useful context for understanding a state’s economic development strategy. Often researchers will analyze outcomes of competing business incentives at inter-state borders to determine whether the use of incentives is beneficial, or if instead they lead to wasteful competition as companies pit one jurisdiction against another to maximize their “relocation” benefits at the expense of taxpayers. The textbook example of wasteful competition is the border war between Kansas and Missouri, which resulted in approximately 10,000 jobs moving between two states at an incentive cost of $330 million, for a net gain to Kansas of only 1,200 jobs.
But is this a universal story? And is this the case in our region? Are incentives purely creating handouts to companies without generating the hoped-for positive employment and economic benefits? To assess this, I study the Washington D.C. metropolitan area and describe how three adjacent jurisdictions took three different economic development incentives strategies. Specifically, I evaluate tax incentives in the District and compare them to the incentives offered in adjacent jurisdictions in Maryland and Virginia; specifically, Maryland’s largest city, Baltimore, and Virginia’s largest city, Virginia Beach, as well as the national average. I compare and contrast incentives offered by type, amount, and sector.
The main findings from this analysis are the following:
- The District’s incentive-granting strategy relies primarily on property tax abatements. By comparison, Baltimore relies on job creation tax credits and research & development tax credits. Virginia relies on job creation tax credits and customized job training subsidies. The remarkable similarity in industry-targeting of job creation tax credit policies in Maryland and Virginia provide suggestive evidence of competitive behavior.
- In the District, taxes and tax incentives are positively correlated, meaning that industries with high tax rates get high tax incentives. By contrast, in Baltimore and Virginia Beach, taxes and tax incentives are negatively correlated, meaning that industries with low tax rates get high tax incentives. This suggests that unlike in the District, these two cities use tax rates and tax incentives together to make strategically important industries more appealing to businesses.
- The District offers some of the nation’s highest tax incentives when measured as a share of the industry value-added. For example, the District’s industry with highest incentives receives tax incentives that are nearly 10 times higher than industries with highest tax incentives in Baltimore or Virginia Beach. Its tax rates are similar to the national average. Therefore, tax incentive recipients benefit from tax rates below national averages.
- The District appears to lack a coherent incentive-granting strategy. Many non-export based industries are given some of the highest tax incentives while some export-based industries are given some of the lowest tax incentives.
 D.C.’s Qualified High Technology Company (QHTC) are tax benefits to companies that deliver technology product or services. The package consists of a combination of discounts on property, sales, and corporate franchise taxes over a 15-year period. Since then, D.C. has significantly pared back the QHTC program.
 Maryland’s incentive package included $3 billion tax credits and exemptions spread out over the 15 years, over $5 billion in infrastructure improvements, and $150 million in direct grants to Amazon from the state Sunny Day Fund — $10 million a year for 15 years.
 In 2012, the New York Times conducted a 10-month investigation and put together a searchable database on business incentives. It identified 48 companies that have received more than $100 million in state grants since 2007. Some 5,000 other companies have received more than $1 million in recent years.
 By some estimates, total incentives offered across the country are as high as $80 billion annually Amazon HQ2 was a discretionary mega deal, but many incentives are non-discretionary, meaning that any eligible firm can apply.
 According to the U.S. Census Bureau, the total amount of state and local tax revenue (excluding intergovernmental revenue, charges and fees, utility revenue, and unemployment taxes) was $1.76 trillion in 2018.
Feature photo by Ted Eytan (source).
D.C. Policy Center Fellows are independent writers, and we gladly encourage the expression of a variety of perspectives. The views of our Fellows, published here or elsewhere, do not reflect the views of the D.C. Policy Center.