The con game known as economic incentives

You promise to bring in business and we'll give you a tax break or free land or some other giveaway. Happens all the time - states, cities, and counties give away $80 billion to companies each year, according to the NYT. More than 5,000 companies received $1 million or more in incentives. But urban analyst Richard Florida says there is virtually no connection between incentives and economic performance. At a time when governments are so desperate for for cash, the handouts are scandalous. In L.A., too many elected officials are too willing to cut deals with little or no thought to how much it might cost in the long run. From Florida:

Our findings are consistent with the broad body of research on incentives. A detailed 2002 study, published in the Journal of Regional Science of more than 350 companies that received incentives, found incentives had a negative effect on these companies's ability to create jobs. Using detailed statistical models to control for a wide variety of factors, the study found that companies that received incentives expanded more slowly than others, and worse yet that overall effect of incentives was a reduction of 10.5 jobs per establishment. Incentives had their biggest effect by far not on actual jobs, but on "announced growth," finding that the average business receiving incentives overestimated its future employment by 28.5 jobs.

No industry abuses the incentive game more than entertainment. Nationwide, $1.5 billion in tax breaks are awarded to Hollywood each year, according to the NYT. For many communities suckered into these arrangements with the promise of a non-polluting, exciting industry, reality is starting to sink in. Unhappy reality. The NYT reported on the not-so-happy results in Pontiac, Michigan:

It all started back in August 2007, when Gov. Jennifer M. Granholm met with Mike Binder, a Michigan-born actor and director who was lamenting the state's lackluster program to award financial aid -- otherwise known as film credits -- to the movie industry. Ms. Granholm, an aspiring actress when she was in her early 20s, became determined to make Michigan competitive, she recalled. Eight months later, the capital of the flailing auto industry became the capital of film tax credits. For every dollar spent locally, filmmakers would receive almost half back from Michigan. That sort of money turns heads at even the richest film studios, and word spreads fast. Janet Lockwood, the director of the state's film office, said that a week after the enhanced credits were announced, she was besieged at a movie conference in Santa Monica, Calif., by "the baby studios to the big guys."


Ms. Granholm declared the city in a financial crisis in February 2009 and appointed an emergency manager, Fred Leeb. The city's budget was $54 million a year, but it was overspending by an estimated $7 million to $12 million. Pontiac was also still weighted down by old incentives it had given to businesses like G.M. The movie studio was an added challenge, since it was seeking financial incentives from the city -- not to mention from other branches of the government. It won redevelopment tax credits from the federal government and separate aid from the state that included incentives for technology companies that hire residents. Job creation became a point of contention with beleaguered Pontiac, which was being asked to waive virtually all property taxes for the studio. The investors claimed that thousands of people would be employed, but Mr. Leeb said that when he asked for job numbers to be written into the contract, the investors refused. "We started seeing some backpedaling," said Mr. Leeb, who added that the negotiations featured "knock-down, drag-out fights."

By the summer of 2011, only 200 jobs had been created - and all but 14 were temporary construction workers. Whether in Pontiac or L.A., incentives of most any stripe are a con game - and the participants know it.

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Mark Lacter
Mark Lacter created the LA Biz Observed blog in 2006. He posted until the day before his death on Nov. 13, 2013.
Mark Lacter, business writer and editor was 59
The multi-talented Mark Lacter
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