In 2019, a significant shift occurred in the economic strategy of Kansas and Missouri, states that share the bustling metropolis of Kansas City. For a decade, these neighbours had aggressively competed for business relocations through generous tax incentives, a rivalry that eventually amounted to a staggering expenditure of $350 million yet yielded a modest return of just 1,500 jobs. Recognising the inefficacy of their approach, they agreed to cease offering tax breaks aimed at enticing businesses to relocate across their mutual borders.
Lisa De Simone, a professor of accounting at Texas McCombs, points out that this scenario indicates a broader trend where business tax subsidies have increased threefold over the past thirty years. However, these financial incentives often fail to meet job creation promises. Despite these challenges, the outright elimination of subsidies has not been widely advocated. Instead, several states have pursued an alternative strategy to ensure these fiscal incentives yield tangible economic benefits. They have implemented disclosure laws that mandate reporting key details about the subsidies, such as the financial amounts and the number of jobs expected to be created. The rationale is that transparency fosters a commitment to fulfilment from companies and governmental bodies, holding each accountable.
In her recent study, De Simone reveals that disclosure laws can enhance local employment, albeit only specific laws prove effective. Specifically, she highlights the success of internal disclosure laws, which necessitate that state agencies responsible for granting tax breaks report these details to other state bodies. These laws not only increase job creation but also offer savings to taxpayers. Conversely, external disclosure laws that require the public release of subsidy details have minimal impact on employment levels.
The study, which also involved Rebecca Lester of Stanford University and Aneesh Raghunandan of Yale University, delved into data from the nonprofit Good Jobs First, covering 48,243 subsidies across 27 states from 2008 to 2015. The subsidies examined were generally smaller in scale, such as tax credits and grants, which are more prevalent and attract less media scrutiny than larger, multimillion-dollar deals.
By correlating these subsidies with employment data from the U.S. Bureau of Labor Statistics and the U.S. Census Bureau, the researchers assessed the effectiveness of internal disclosure laws. They discovered that states with such laws could reduce the subsidies required to generate employment, significantly lowering the cost per job created – a cumulative saving of $594 million nationwide. De Simone notes that with internal monitoring, the benefits derived from a single subsidy are comparable to those from two subsidies in states without such regulations.
Several factors contribute to the ineffectiveness of external disclosure laws. Governments may sidestep these laws by opting for other incentives that do not require disclosure or by providing outdated information, thus impeding effective public scrutiny. De Simone suggests concerns about potential backlash or more dubious motives, such as favouritism, might discourage transparency.
De Simone hopes her findings will catalyse public demand for more accurate and timely information on business tax subsidies. Improved monitoring could deter less committed companies from seeking subsidies merely on the promise of job creation and could lead to more efficient and effective use of taxpayer money. She believes better transparency could compel governments to improve their disclosure practices, potentially leading to more accountable and fruitful economic policies.
More information: Lisa De Simone et al, Tax Subsidy Disclosure and Local Economic Effects, Journal of Accounting Research. DOI: 10.1111/1475-679X.12591
Journal information: Journal of Accounting Research Provided by University of Texas at Austin