Many cities use tax incentives and other gimmicks to attract large companies with the hope of spurring economic growth and employment. However, a recent study indicates that large companies may not boost economic growth, and in fact, may displace other businesses.
William F. Fox and Matthew N. Murray of the University of Tennessee measured economic growth in two groups of both metropolitan statistical areas and countywide areas: those with the presence of at least one large company (employing at least 1,000 people) and the “control” group, those without a large company.
Researchers found the median MSA with a large-company location experienced an employment increase of about 2.36 percent during the 1980s compared with the non-location MSA of 1.84 percent. However, the county in which the MSA and the large firm was located actually experienced slower rate than the control counties.
The growth rate of a state’s metropolitan area, however, was positively correlated with the growth rate of the state as a whole. The presence of large companies in a metropolitan area did not have a statistically significant positive or negative impact on economic growth in that area, after controlling for statewide economic conditions.
The researchers concluded that the race for attracting large companies through local tax abatements and other economic incentives does not necessarily translate into a path of regional employment and personal-income growth.
The paper is William P. Fox and Matthew N. Murray, “Do Economic Effects Justify the Use of Fiscal Incentives?” Southern Economic Journal 71, No.1, July 2004.
Stadium subsidies questioned
Not too long ago, cities were willing to put up sales tax increases in order to build new-stadium venues and lure sports teams, but the willingness of taxpayers to fund wealthy team owners may be becoming a thing of the past.
Stadium advocates claim that taxpayer-subsidized stadiums benefit local communities by providing jobs and attracting potential sales revenue from out-of-towners attending games. Governments have ponied up about $20 billion over recent decades to finance sports ventures.
Numerous studies show that public benefits have not materialized. A Heartland Institute study found that in 12 metropolitan areas, sports-team venues did not contribute to net employment. Economist Roger Knoll found that only 5 percent to 10 percent of attendees of a local sports event lived elsewhere, and that game attendance merely substituted for other local leisure activities.
A 1998 study by University of Maryland Baltimore County economists Dennis Coates and Brad Humphreys found that professional sports franchises had no effect on per-capita income growth in metropolitan areas.
A study by the Congressional Research Service found that Maryland’s acquisition of the Cleveland Browns, now the Baltimore Ravens, cost state taxpayers $331,000 per job, 50 times more than other economic development efforts.
Taxpayers are growing weary of publicly financing stadiums and have indicated so to city representatives who promise to take from the poor and give to the rich. In Washington, D.C., voters in the two poorest wards voted out their pro-stadium councilmen, who had supported the mayor’s offer of $200 million from taxpayers to build a stadium. The Missouri legislature rejected most of the subsidies requested by the St. Louis Cardinals.
Team owners have privately funded stadiums in the past, but will be reluctant to do so in the future as long as cities have willing taxpayers.
Demand-response saves money
Recent studies show that electricity demand-response programs have saved customers millions of dollars and could save billions more. The programs use price incentives to encourage consumers to use less power at times of peak demand, thereby increasing the reliability of the power grid.
While benefits from demand-response are potentially large, three main barriers limit their introduction and expansion: state regulations that shield consumers from price fluctuations, a lack of equipment at customer’s locations to monitor and reduce power consumption as needed, and customers’ limited awareness about the programs and their benefits.
Gulf Power, a regulated utility in the Florida panhandle, was able to effectively overcome these barriers. A rate impact test allowed state regulators to review and approve the program proposed by the utility because of its benefits to both participants and nonparticipants. Gulf Power also overcame the barrier of inadequate equipment by installing new technologies, including a computerized controller, called a “gateway,” that integrates the metering, communication and switches to control demand. The Florida utility used mass-marketing techniques to make customers aware of the program and to provide basic information about the advantages to participants.
The GAO reported three important lessons for such programs to succeed. First, programs must have sufficient incentives to make customer’s participation worthwhile.
Second, programs are more likely to succeed if state regulators and market participants are receptive to potential benefits of demand-response programs in their areas.
To achieve these benefits, the design of programs should consider appropriate outreach, the introduction of necessary equipment, and the ease with which customers can participate.