Opinion and Economic Analysis

Hicks: Local government should track job growth, too

March 15, 2014

With the passage of House Bill 1020, Indiana is poised to perform a comprehensive and ongoing analysis of our state tax incentives. This comes on the heels of a broad effort by the Indiana Economic Development Corp. to become open to evaluating tax incentives.

IEDC’s recent creation of a transparency portal and its commissioning of a study by my center to review incentives already make Indiana the most forward-thinking state on these issues.

Before we get down to evaluating economic development incentives, we ought to understand just what it means to “create a job” and how we can honestly evaluate tax incentive policies.

Over a typical year, more than a half-million jobs are created by Indiana firms through expansions or new establishments. Over the same year, about as many jobs are destroyed as businesses contract or close.

In a good year, more jobs are created than destroyed, but in any year there is a lot of churn.

At the state level, economic developers work with fewer than 5 percent of the employers of new jobs. At the local level, some economic development groups work with a higher share of employers, but rarely, if ever does it exceed 15 percent.

The simple fact is that nearly all jobs are created without the help of development officials, but this does not mean we should dismiss their efforts.

Economic development efforts are mostly targeted at footloose businesses that could locate anywhere—typically headquarters, manufacturing and logistics firms.

A business moving to or expanding in Indiana will usually predict job growth. Those predictions are unlikely to be exactly right. At the state level, we should not worry too much about these predictions because the largest state development incentives are tied to actual jobs created, not predicted jobs.

This is not so at the local level. There is incentive to “over-predict” job creation in order to secure property tax abatements or infrastructure help through a tax-increment financing district. So, what should we do about it?

The success and failure of our economic development efforts should be measured simply by how much better our economy (state or local) becomes.

Indiana’s secretary of commerce focuses on net job growth, but I know of no local government that does. Such a simple approach would force local governments to weigh their economic development efforts (including abatements) against other things that really matter to growing an economy, like school performance and the quality of local parks and streets.

This hurts, rather than helps, efforts to make Indiana a better place.•

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Hicks is director of the Center for Business and Economic Research and a professor of economics at Ball State University. His column appears weekly. He can be reached at cber@bsu.edu.

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