Blog Posts > Rockwool Highlights Need for Scrutiny of Tax Subsidies

Rockwool Highlights Need for Scrutiny of Tax Subsidies

Written by Ted Boettner on December 1, 2018

Charleston Gazette-Mail – The story of the proposed Rockwool manufacturing plant in Ranson, West Virginia, has not only ignited community concerns over toxic air pollution and sustainable development, but has also brought to light the large business tax subsidies given to corporations with little transparency, accountability or evaluation. Story link.

After Rockwool already chose to locate the controversial site in Ranson, the Jefferson County Development Authority (JCDA) decided to give out millions in business subsidies. The JCDA agreed to buy the plant, land, and machinery and equipment and lease it back to Rockwool. This move would allow Rockwool to avoid paying millions in property taxes over the next decade that help fund schools, public safety and roads in Jefferson County. This Payment in Lieu of Taxes (PILOT) agreement happened with little public input. On top of these subsidies, the state included millions in loans, site prep, infrastructure and other state tax credits.

Business tax incentives are largely a waste of money, according to most economic studies. However, they can offer political advantages because the public may not understand the economic trade-offs that exist, such as less investment in our schools and workforce or lower taxes for everyone. In the case of Rockwool, the trade-offs could be that alternative forms of development and investment may yield more jobs and income for Jefferson County over the long-run.

Over the last several years economic development officials have put together mega deals worth millions for companies such as Proctor & Gamble, Macy’s, Gestamp and Hino Trucks. These deals include not only tax credits and property tax abatements, but also money for relocation assistance, job training, low-interest loans or industrial bonds. While these deals may be great investments, there is no rigorous evaluation of whether these deals are a good “bang for the buck.”

According to a 2017 report by Pew Charitable Trusts, West Virginia is trailing most states in evaluation of business tax incentives. States that are leading the nation, which are as diverse as Mississippi and Maryland, regularly “produce high quality evaluations that rigorously measure economic impact, and a process for informing policy choices.” In my experience, not only has West Virginia passed new business tax incentives without including an evaluation (e.g. Alternative Fuels Tax Credit), but they usually pass them with a price tag of zero — which makes them easy to enact. This can make it harder to balance the state’s budget to pay for schools, health care and public colleges.

Conservatives tend to dislike business tax incentives because they distort business investment, promote rent-seeking behavior (e.g. lobbying to rig the system), increase corporate tax rates and they don’t like government “picking winners.” As someone who has spent over a decade working on economic policy at the state Capitol, I can attest this is mostly true. For progressives, like me, the bigger problem is they redistribute money upwards from the average taxpayer to mostly wealthy capital owners, they often subsidize low-wage jobs for out-of-state workers and they create a “race to the bottom” between states in economic development.

While academics and other researchers have been studying business tax incentives for decades, recent work by economist Tim Bartik with the Upjohn Institute is by far the most comprehensive and far reaching. Bartik finds that state and local governments spend an estimated $45 billion annually on incentives to attract business development and that almost all of this money goes to large businesses instead of small businesses and entrepreneurs, who are often touted as the real “job creators”.

In his analysis, Bartik finds that business incentives only “tip somewhere between 2 percent to 25 percent of firms to favor the location providing the incentives.” This equates to a failure rate of 75 percent. A recent survey by Virginia’s legislature found a similar result, finding that just “39 percent of firms would not have proceeded with project(s) except for incentive(s).”

Whether incentives are effective depends heavily on the job multiplier (do they create more jobs in other local businesses), the level of wages paid, how many local unemployed people are hired, how well the economy is doing and how they are financed. If the incentives are paid for by cutting education alone, they can reduce incomes over the long-run by $4 for each $1 spent on incentives, according to Bartik.

Short of federal action, West Virginia policymakers should require all state and local business tax incentives to be fully disclosed and they should be regularly evaluated each year using rigorous analysis to examine trade-offs (less money for schools), indirect impacts (crowding out of other businesses), design and how they influence business behavior. Only then, will we have a clearer idea if they are in the interest of the community and are in the long-term best interests of state residents.

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