BOHANON & CUROTT: Luring businesses with incentives won’t pay off long term

Recently, Walmart selected Hancock County as the future location of the nation’s newest and largest fulfillment center. Walmart’s investment of $600 million in the facility is expected to create up to 1,000 jobs for Hoosiers by 2025. This news is welcome in a time of such high unemployment, but it’s not an unqualified blessing.

Over the years, Walmart’s many innovations in inventory and supply-chain management have generated enormous cost reductions. In turn, Walmart’s low prices benefit consumers. Estimates suggest Walmart reduces the cost of living for the typical American household by around $3,000 per year.

Walmart Fulfilment Service continues this trend of greater productivity by extending cost reductions to online operations through Walmart Marketplace. Other sellers can partner with Walmart and grow their e-commerce by paying to use Walmart’s unrivaled capabilities to warehouse, pack, ship and handle returns for their own online business. Beyond creating new jobs in Indiana, Walmart’s new fulfillment center will create economic growth by expanding and reducing the cost of online commerce.

So, what’s not to like? The concern is that our state and local governments offered millions of dollars in conditional tax credits to lure Walmart’s investment. Counterintuitively, academic research finds that selective tax incentives do not increase overall employment or business investment. It turns out incentives play a weak role in businesses’ location choices, and that attraction of mobile firms provides a minuscule amount of overall employment growth.

Even in cases where incentives attract firms, they generate perverse consequences. The additional public services needed to accommodate the new businesses and their accompanying migrant workers might not be covered by the additional tax revenue generated by firms with tax reductions. The resulting higher tax bill crowds out government services, such as spending on public education, or increases the tax burden for other businesses. In the long run, this destroys as many jobs as were initially created.

Tax incentives also encourage crony capitalism. Corporations engage in rent-seeking behavior, lobbying for tax breaks and other subsidies and playing governments off one another. From the overall perspective of the economy, the resources wasted in this zero-sum game are a net loss.

E-commerce is the wave of the future, and we are glad to see its expansion in Indiana. But rather than playing favorites, the best way to ensure continued progress is with an across-the-board system of competitive taxes, property rights protection, and efficient investments in public goods.•

__________

Bohanon and Curott are professors of economics at Ball State University. Send comments to ibjedit@ibj.com.

Please enable JavaScript to view this content.

Editor's note: You can comment on IBJ stories by signing in to your IBJ account. If you have not registered, please sign up for a free account now. Please note our updated comment policy that will govern how comments are moderated.

3 thoughts on “BOHANON & CUROTT: Luring businesses with incentives won’t pay off long term

  1. How do explain the apparent success of towns like Plainfield and Brownsburg? They actively used tax abatements and other economic development incentives to encourage companies to locate there. It appears that over the long term this has provided them great revenue to utilize for civic infrastructure such as parks, trails, school growth, etc.

    1. They are/were the next spots in suburban development. One located closest to the airport and on a major interstate the other on an interstate. If the developers and the city councilors/redevelopment commission members had to sign the “but for” test under penalty of perjury, that I would not have developed or bought this property but for tax incentives, I would guess most of the decent ones would not sign. However, it is a legal opportunity to lower your tax bill, why not? These places would have developed despite tax incentives, but it really does call into question whether Daniels was wrong to arbitrarily distinguish between different classes of property tax payers, because most of the developers end up lowering their tax rates back toward the 1% cap for residential. Cut out the middlemen and life will continue fine.

  2. Hancock County beware – once that Distribution Center i9s built, Wal Mart will start telling you how to run the County. Talk to any Wal Mart supplier. Once you start doing business with them it is their way or you are out.

    Suppliers who pay the freight charges for shipping to Walmart Inc.’s U.S. distribution centers must fulfill orders exactly as Walmart wants, hit the company’s “must arrive by” date at the designated DC, and accomplish both at least 98% complete order and on time delivery or face a fine equal to 3% of the cost of goods sold. The directive applies to purchase orders supporting both brick-and-mortar and e-commerce transactions. By requiring suppliers and carriers to hit uniform targets regardless of the goods being shipped.

{{ articles_remaining }}
Free {{ article_text }} Remaining
{{ articles_remaining }}
Free {{ article_text }} Remaining Article limit resets in {{ count_down }} days.