States rethinking tax credits as job creation tool

Want to create jobs? Just create a tax credit for businesses.

For decades, that's how many governors and state lawmakers have approached economic development. But with budget deficits collectively in the billions of dollars and unemployment rates still uncomfortably high, some state officials have begun to rethink whether the jobs promised from tax credits are worth the drain on state funds that could go to public schools and services.

Perhaps nowhere is the tax credit tension more evident than in Missouri, where lawmakers have convened a special session to consider scaling back several existing tax credits in order to finance new tax incentives targeting a variety of business interests — from Chinese cargo planes to computer data centers, high-tech companies and even the organizers of major sporting events.

Democratic Gov. Jay Nixon and Republican legislative leaders tout it as one of the most far-reaching job-creation packages being considered among states. But it faces opposition from some lawmakers who see it as the latest give-away of taxpayer dollars to big businesses at the expense of school children, the disabled and elderly.

The battle in Missouri and several other states mirrors that in Washington, where President Barack Obama and Republican congressional leaders are expected to clash in coming weeks over the right mixture of tax breaks and spending to stimulate the economy without plunging the nation deeper into long-term debt. The outcome figures to play prominently in the 2012 elections as incumbents seeks to assuage voter concerns about both the economy and government spending.

"There is a tension between just about everybody," said Sen. Chuck Purgason, a Republican who has wavered on whether to back the Missouri plan. "You've got core Republican principles that government doesn't create jobs — the private sector creates meaningful jobs — and what you need is broad-based tax reform."

For others, he said, "their idea is for government to take money and incentivize aspects of trying to stimulate the economy."

Tax credits have been popular among many politicians because they directly reduce the taxes that a business must pay, unlike a tax deduction which only reduces the income that can be taxed. Some states also allow tax credit vouchers to be sold, which allows the recipient to generate upfront cash for a project.

As lawmakers consider an overhaul of Missouri's tax incentives, a task force in Oklahoma is reviewing whether the state's estimated $5 billion of annual tax cuts, exemptions, and deductions — many of them intended to attract jobs — truly are serving the public good.

"We know that while government cannot create prosperity, it can and should help create conditions that encourage it," said Rep. David Dank, an Oklahoma Republican who is leading the task force. He said the review is "a sincere effort to determine what works, what doesn't, and what reforms we should make."

In New Mexico, Republican Gov. Susana Martinez ordered agencies last month to prepare an annual analysis of whether tax credits are costing the state revenue and creating jobs.

Some states have continued to create business tax credits this year under the belief that the lost revenue will be replaced as companies hire workers, who in turn pay individual income and sales taxes.

In Wisconsin, for example, the Republican governor and Legislature enacted a new income tax credit for manufacturers that eventually could cost the state $128 million a year — a move that Democratic Rep. Tamara Grigsby decried as "shameful" and "nauseating" after cuts to public education and other areas.

Connecticut's Democratic governor and Legislature also expanded tax credits, offering incentives to the first five businesses that agree to create 200 jobs and invest $25 million in the state. A new Idaho law will offer businesses tax credits worth between 2 percent and 6 percent of a new employee's annual wage.

Yet after decades of adding tax incentives, Oregon lawmakers this year abolished about a dozen tax credits and reduced several others to save the state more than $125 million over the next four years. Hawaii lawmakers decided against enacting a new incentive sought for filmmakers. Louisiana Gov. Bobby Jindal signed into law several expanded tax breaks but vetoed several others passed by lawmakers.

In Missouri, the value of annual tax credit redemptions increased more than fivefold from 1998 to the 2010 budget years, prompting increased criticism. Among the tax breaks on the chopping block are ones for developers who build low-income housing or renovate historic buildings — two of Missouri's mostly costly tax credits.

Missouri officials say the savings are essential to afford new incentives for businesses, such as the $360 million of proposed tax credits intended to transform the St. Louis airport into a hub for Chinese cargo planes and other international trade. Other new incentives seek to lure large computer data centers used by the likes of Google or Amazon and high-tech companies with a scientific emphasis.

"We're trying to move the state forward on jobs when a lot of other people around the country are kind of frozen," said Missouri Gov. Jay Nixon.

But some Missouri lawmakers doubt the proposed business incentives will be any less of a drain on the state budget, which has seen funding slashed for public colleges and universities, student scholarships and busing for elementary and secondary schools. Republican state Sen. Jason Crowell has threatened to filibuster the proposal. He's particularly peeved that Missouri would subsidize the importation of China-made products, which compete with American-made goods.

Missouri's proposed business tax breaks also have drawn opposition from some tea party participants and a free-market think tank financed by one of the state's most active political contributors.

Tax credits are "an attempt to place a bet really — for whatever reason, we think this industry or this company is going to be more successful," said Audrey Spalding, a policy analyst at the St. Louis-based Show-Me Institute. "Nothing miraculous happens to a lawmaker when they're elected to state office that gives them the ability to figure that out."


Associated Press writer Sean Murphy contributed to this report from Oklahoma City.