Clawback provisions won't hurt biz attraction

March 30, 2009
I have spent a disproportionate amount of my time thinking about tax incentives to business. The result has been one book and a whole slew of academic papers (the type with Greek letters and extensive mathematical notations that are so helpful in putting toddlers to sleep).

As a result, I have read with keen interest a proposal in the Indiana House that affects the state's tax-incentive program.

House Bill 1338 introduces a change to many (but not all) of our state's tax incentives, adding what is known as a "clawback" provision. This requires businesses that receive tax incentives but have not met their stated jobs or investment goals to repay all or part of these incentives. By my count, more than 20 states have clawback provisions, and I believe it is a growing trend.

By my reckoning, this is a piece of legislation that offers a reasonable and fair adjustment to our current tax incentives. Here's why:

Economists who have studied tax incentives have not found much to praise. I think this is for three reasons. First, nationwide, the use of tax incentives has been ill-documented and poorly executed. Even if their use has been successful (and certainly many have been), the data is often too poor to analyze results.

Second, firms have a huge incentive to misrepresent their plans. Companies that are ruthlessly truthful about their investment and job-creation expectations may be at a real disadvantage when facing those who tell a less honest story. An important study of Ohio firms in the 1990s found that firms that received tax incentives produced far fewer promised jobs than those who did not receive the incentives. Finally, most incentives are really only traditional infrastructure investments that the state or local governments would make under any circumstances. They are simply part of good state and local government masquerading as a "business incentive."

Indiana has a superb reputation regarding tax incentives. The state is careful, limited and transparent with its provision of such perks. They go to very few firms (unlike California and West Virginia, which give millions of dollars to big-box retailers). The folks at a group known as "Good Jobs First," a union-financed incentive watchdog, give Indiana a grade of A in the transparency of its program. Despite the care and limitations of our programs, we do very well in business attraction. We can still be more prudent.

The clawback provisions in HB 1338 are reasonable. The required repayment of incentives by firms that do not meet their commitments places only a modest burden on new businesses. This bill keeps Indiana in the group of honest players when it comes to tax incentives. That is where we need to stay.


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