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A Conversation With…

The Government Finance Research Center works with researchers from a variety of backgrounds to analyze the role that public finance plays in our lives. In the interviews below, we talk with experts to dig deeper into pertinent topics and get their perspective on the past, present, and future of government finance.

Nathan Jensen, Professor, Department of Government, University of Texas-Austin Heading link

photo of Nathan Jensen

Q: There’s been discussion about the use of tax incentives for economic development for some years now. Are they in more common use than they used to be?

Jensen: We know from the data that there has been an increase in the use of tax incentives, but it hasn’t taken the form of more companies getting incentives. The dollar amounts have gone up because there are more megadeals. In just the last two years there have been some massive deals, notably in some of these massive semiconductor fabrication plants.


Q: Can you speculate about the reasons for the boom in incentives for big companies?

Jensen: It’s hard to hard to say exactly what triggered that. But the nice way to put it is that there’s been innovation in state and local governments toward using tax incentives for big deals. A more negative way to describe this is that it’s been a race to the bottom.


Q: Have there been any changes in the capacity of states or localities to give incentives?

Jensen: Yes. Some of the states have enacted special legislation for incentives. This happened in Maryland when the state was trying to attract Amazon’s planned-for HQ.  Similarly, Kansas used special legislation to help attract a Panasonic battery plant. And Michigan passed legislation at the end of 2021 to put billions of dollars into its Strategic Outreach Attraction Reserve, designed to attract big business.  


Q: There must be a large variation in the way localities use tax incentives, right?

Jensen: Yes, In Texas, for example the state authorizes cities and counties to give tax abatements, but the willingness of the counties and cities to give it varies. So, Austin is pretty tight on this. We don’t give a lot of incentives. But in the Dallas metro area the area is kind of guns a’blazing, giving incentives. And then across the country you see real variation in whether or not they’re authorized to give incentives and what kinds of incentives they can give.


Q: When states provide abatements or other incentives, are the localities usually involved?

Jensen: The short answer is that if you see a big deal with a lot of state money, it’s almost guaranteed that there are layers of incentives, including those from localities.


Q: Do the levels of government tend to work together to make their use of incentives most effective?

Jensen: I’m always surprised at how little communication there is. I was talking to a city government here and saying ‘What is the county offering? Have you talked to them?’ And I heard that there was not the open line of communication that you’d expect. By contrast, when Toronto’s leaders were trying to attract Amazon, they talked with the federal government, the Canadian government, to help streamline visas, so that there would be a special visa office and they would help Amazon is they located in Toronto, to work with the federal government. You just don’t see much of this kind of coordination here.


Q: Are we right to believe that not only is there a lack of coordination, but there’s also a fair amount of battling between communities and states to attract businesses?

Jensen: One concrete example I know is this. Samsung is building a huge semiconductor fabrication plant and it asked Texas for incentives and then played two locales against one another locally; both Austin and Taylor.  That makes it pretty hard for the state to coordinate things.

You see companies that are in the Washington, DC area, playing Virginia, Maryland and DC off each other, even though they’re all the same metro area, right? You just literally can move a mile one direction and be in a different community. And you can even talk about sports stadiums. You know the Chicago Bears are shopping around different areas in the Chicago area for incentive for a new stadium. They’re playing these locales off against one another and they’re trying to get state money, too So, it’s a really awkward, weird deal.


Q: The lack of transparency about these offers really helps give the corporations an advantage, does it?

Jensen: It’s up to the companies what they disclose. Companies can reveal what other locations are offering if they want if that helps them get a better deal. New Jersey is notorious for making huge incentive offers, which lets companies take those offers to other states, like Texas. But if one of the locations you’re considering is not offering incentives, you probably don’t want to let other locations know that. It’s completely asymmetric in terms of information. The companies know all the offers and they can use those offerings however they want or they can just sit on them quietly.


Q: It’s our understanding that it’s not the companies themselves who are playing these games but consultants who handle the negations. Is that right?

Jensen: That’s where the real expertise is. These consultants negotiate on behalf of the companies. We just had an instance here in Austin in which a semiconductor company had a couple of meetings with our school board, and the company itself didn’t even show up. It was their consultants talking on behalf of them, and there’s [power in negotiating when they can say] “We’re not authorized to tell you certain things.”

Consultants are also seeing offers from other companies, so they get a good idea of how much a particular city will pony up. They’re really powerful, and they can take a flat fee or take a percentage of the incentive.


Q: I’ve heard that the CHIPS Act is also contributing to the use of incentives. True?

Jensen: Yes. Under the CHIPS Act, companies actually need to demonstrate local interest in order to get funding for a corporation’s work and that can take the form of incentives. So, their consultants use this to push state and local governments, saying that if you really want to get this project then you have to give us incentives. In my kids’ school district here in Austin, consultants for semiconductor manufacturer NXP told our school ditricts they believed the CHIPS Act would be a matching fund. The more incentive they secure locally the more they can secure from the Federal government. As a result, we see that recipients of these federal incentives are now the biggest recipients of state and local incentives.


Q: So, there are lots of incentives out there, but to the best of your knowledge do they wind up being the determining factor in a corporation’s decision to build someplace?

Jensen: The best academic work on this was done by Tim Bartik at the Upjohn Institute. In a study of his that I cite to everyone, he found that between 2% and 25% of incentives are pivotal in attracting a company. So, at best you are giving 75% of your incentives to companies that are coming anyway, and at worst 95%. And that tracks with my own research. It’s kind of the open secret here.

Also, a lot of the states have done audits of their own programs, and most of these audits come back looking pretty bad. But it’s hard to prove, because companies have better information than the governments. But as far as we can tell most of these dollars are burned for companies that were coming anyways.


Q: With this kind of evidence, why don’t officials push back against incentives that might have no impact?

Jensen: Sometimes bad public policy is good politics. And the main finding of some of my research is that there are very few things a governor, mayor or city council member can point to that show that they’ve caused the economic development in their region or state. So, incentives are one of the common things that a politician will point to say they negotiated and that’s why the company came. We call it credit claiming. So, even if the company was coming and the governor or mayor knows they’re coming, when you offer an incentive, you can have a ribbon company and the company says “Thank you, without the governments support we could not have made this work.”


This interview was conducted with Richard Greene, senior advisor, GFRC, and principal of Barrett and Greene, Inc.

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