The Problem With Incentives

Spencer J. Cox
Jun 26 · 5 min read

I hate corporate incentives.

There, I said it.

But more on that in a minute. First let’s talk about the good news. For the past 10 years Utah’s economy has been absolutely booming. From a peak unemployment rate of near 8% shortly after Governor Herbert took office in 2009 to 2.9% unemployment now, Utah’s recovery from the Great Recession has been breathtaking. In fact, Utah now boasts more than 5 straight years of unemployment under 4% (Which just happens to coincide with me becoming Lt. Governor…but I will try not to take all the credit*…[*this is a lame attempt at a joke]). Even more impressive, Utah has led the nation in private sector job growth for the past decade. By some accounts this is the longest period of prosperity in our state’s history. It is not hyperbole to say that our economy is the envy of the nation.

Now, back to incentives. I believe in the power of free markets. Free market capitalism has done more to eradicate real poverty than any other socioeconomic system in the history of the world. Conversely, tax incentives inherently change the playing field in free markets and can lead to governments — not markets — picking winners and losers. In a perfect world, NO STATES would give cash or tax breaks to attract companies, and states would be compelled to compete solely on the basis of their workforce, infrastructure, tax/regulatory policies and cost of doing business.

Unfortunately we do not live in a perfect world. Other states have robust corporate incentive programs that seek to lure companies away from Utah and win the business of those looking to relocate from other states. To stay competitive, Utah has also offered incentives. The good news for taxpayers is that Utah has chosen a conservative system that only gives post-performance tax breaks to companies — thus ensuring that promises of job creation and economic benefits have been realized before any tax rebates are issued. Unlike some states, we do NOT recklessly hand out checks to companies on the front end.

There is no question that corporate incentives have played a positive role in this economic boom. During this period of growth, the Governor’s Office of Economic Development has issued close to 200 tax incentives to encourage businesses to relocate or expand in our state. So if things are going so well, why should we consider changing now?

In short, we are not the same economy — or state — that we were 10 years ago. Back then, when unemployment was at 8%, it made more sense to award some incentives to bring every possible job we could to our state. In 2009 we were desperate for jobs and Utah was the spunky upstart, rarely mentioned as one of the best places in the country to do business. That has all changed now. Utah has become renowned as THE state to do business, with too many accolades to mention. Utah is on the map and companies are coming here whether or not they get a big incentive.

Furthermore, at 2.9% unemployment, we already have thousands of jobs that are going unfilled. Our biggest challenges are no longer employment related, they are GROWTH related. Traffic congestion, clean air, housing affordability and a qualified workforce are rapidly outpacing other concerns on the minds of voters and businesses alike. Does it really make sense to continue promising tax rebates in this atmosphere to every possible company when many of them would likely locate here anyway? Of course not. And while the Wasatch Front, the Wasatch Back and many other counties have booming economies, some rural areas are still desperately struggling with high unemployment and shrinking economies. It’s time to reevaluate our current approach.

Six months ago, I invited several of the best minds in the state to discuss this critical issue. In the meeting were representatives from the private sector, the Salt Lake Chamber, Silicon Slopes, think tanks, legislative and congressional representatives and state and local economic development leaders. The discussion was robust and several important themes emerged:

  • Free markets matter most: Business location and expansion decisions are generally best left to the private market, without government tilting the playing field.
  • Consider the true cost of incentives: Historically we have only looked at the benefit of new business without understanding the cost to infrastructure, housing, air quality, etc.
  • Focus on economy-wide factors: Government economic development activity should be less about incentives and more about foundational, economy-wide factors that attract business and entrepreneurs, including:
  1. A highly skilled and educated workforce;
  2. Accessible and well-managed basic infrastructure, such as transportation and utilities;
  3. Good governance and civic leadership that comes together to solve problems;
  4. Sound, broad-based tax policy for both firms and households;
  5. A properly regulated market that impedes bad actors, but keeps transaction costs low;
  6. A high quality of life for Utah citizens.
  • Allow for a limited number of more flexible incentives: Incentive programs should look different with 8% unemployment than 3% unemployment. We must be comfortable losing out on some opportunities to other states who offer richer incentives without the same kind of robust performance metrics that we require. At 8%, we claw for every job. At 3%, we need the flexibility to pivot our incentives towards workforce development, infrastructure build-out, and placemaking.
  • Move to highly selective inducements: Be more selective with firm-level financial incentives in highly-developed areas of the state, reserving certain incentives for rare once-in-a-generation “anchor tenant” projects with massive and unquestioned economic multipliers. In short, Utah’s success allows us to be more selective than ever before.
  • Make room for more robust rural incentives: Reserve the best incentives for companies that are willing to invest in and build up economies in struggling rural counties.

Shortly after this meeting, I met with Speaker Brad Wilson and a team of legislators to give input on potential legislation around this topic. I am grateful to Speaker Wilson, President Adams and others for pushing forward an effort to seriously reevaluate our state’s economic development strategy and begin implementing the changes suggested above. As a result of those meetings, the legislature passed — and the Governor signed — SB172 which begins the process. Under SB172, GOED is charged with drafting a plan for the state by October 1, 2019 explaining how they intend to implement these critical changes. I am pleased to report that this process is well underway and GOED is engaging with leaders from across the state and various agencies to prepare a way forward. We will be working closely together to make sure we get this right.

President Reagan said it well, “There are no easy answers, but there are simple answers.” Now is the time to make changes to our economic development policy to reflect both our success and the challenges in front of us. Utah has the best performing economy in the country and has proven that it’s the place to do business. Taking a fresh, conservative approach to incentives will help keep it that way for generations to come.

Spencer J. Cox
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