Incentive programs tough to evaluate

A Bangor Daily News editorial on April 5 calls for the review of Maine’s economic development incentive programs. This recommendation follows a 2006 report by the Office of Program Evaluation and Government Accountability that found Maine’s incentive programs are lacking in oversight and accountability.

Some likely questions on everyone’s mind are what are these programs trying to accomplish and are they effective at meeting their goals. Such scrutiny is warranted given the large amount of public resources that fund incentive programs.

Economists, including myself, have spent years studying the effects of taxes and economic development incentives on business growth and local vitality. The academic literature on this topic is vast and the results cover the spectrum, from taxes and incentives matter quite a bit to taxes and incentives matter some but are of less importance than things such as a skilled work force and a region’s quality of life.

Back in 2000, I looked at the effects of four of Maine’s incentive programs on business employment growth. This research was conducted for and funded by the Maine Economic Development Incentive Commission, which was formed by the 1997 “Act to Encourage Accountability and Return on Investment for Maine Taxpayers from Economic Development Incentives.” My work at that time focused on the amount of incentives provided per job associated with participation in the incentive programs.

I recognized in 2000 and still believe today that employment growth, although a favorite statistic of policymakers and the general public, may not be the best measure of success because two of Maine’s biggest programs – BETR and TIFs – are directed at capital investment and not explicitly aimed at job creation. Nevertheless, I found that 4,730 jobs between 1998 and 1999 were associated with the incentive programs, at a cost of $8,176 per incentive-related job.

A limitation of this research is that it said nothing about whether the incentives actually “caused” the job creation or simply rewarded growth that would have occurred without the incentive. In Ohio, I conducted a study that looked at the “causal effects” of incentives and found that they resulted in lofty job promises (when incentives were requested) but did not affect actual growth. However, the results from Ohio did not tell us whether, without the incentive, the business might have left the state for greener pa$ture$.

One way to find out if incentives really matter to businesses is to ask them directly. A survey we completed last year found that 49 percent of businesses in the environmental and energy technology sector felt that state and local tax incentives affect their profitability or growth potential. However, these companies were considerably more apt to cite the importance of business climate factors such as utility costs (75 percent), availability of qualified employees (64 percent) and Maine’s quality of life (81 percent).

Our survey of biotechnology companies conducted in 2003 led us to the same general conclusion: Incentives matter to some companies, but they appear to be less important than other business climate factors. One of the most surprising things that we found in both of these surveys is that, even for well-publicized programs such as BETR, a sizable number of businesses do not even know that the incentives are available.

My experience suggests that evaluating Maine’s incentive programs will not be a straightforward task. It will require a good deal of thought about program goals and objectives, a handle on how businesses and communities feel about incentives, and reliable information and methods. Economics provides the tools for such an analysis, but no doubt politics will enter into the process and affect how findings are viewed.

Todd Gabe is an associate professor in the School of Economics at the University of Maine.