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Report: Tax Incentives Waste Money, Don’t Create Jobs

A study funded by Heinz Endowments and undertaken by non-profit Good Jobs First has questioned the value of Pennsylvania’s use of large tax breaks to lure high-tech business to the state and keep existing players from relocating.

The 94-page study, called “Growing Pennsylvania’s High Tech Economy: Choosing Effective Investments,” released today, compared Pennsylvania’s incentives and job-creation results with numbers from Maryland, New Jersey, New York, Ohio, North Carolina and West Virginia.

The report concluded that a reliance on tax incentives is costly, risky and potentially ineffective in creating long-term job growth.

The survey drew upon 20 years of Pennsylvania employment data, and found that since 1990 nearly all of the growth in the state’s high-tech economy has come from companies founded in the state. Special tax rates or incentives designed to lure new companies across state lines have proved to be ineffective, the report said, finding that Pennsylvania’s tax rates are about average for the group of state’s surveyed.

Companies are more concerned with cost factors including labor and occupancy than tax-based incentives, according to the Good Jobs First report. “Tax breaks are windfalls, not determinants, and are therefore wasted,” the study stated.

According to the report, Pennsylvania saw a net gain of high-tech companies from 1990 to 2006, with about 1,241 moving into the state while 1,198 moved out. However, during the same time period, the Keystone State lost 2,850 related jobs.

Project director Greg LeRoy told a press conference announcing the report’s results that “everything matters more than [taxes] do.” The Good Jobs First report suggested that focusing on Pennsylvania’s existing strengths—such as the nuclear and civil engineering sectors and biomedical, both strong in the Pittsburgh area—would be more effective as a tool for job creation.

The report was critical of the approach Pennsylvania took to Westinghouse Electric’s expansion in Cranberry. To make sure the project didn’t go to North Carolina, Pennsylvania enacted a new Strategic Development Areas program that provided tax exemptions and incentives for companies employing at least 500 workers and expending more than $45 million in capital investments within three years. As a result of the new incentive, Pennsylvania awarded Westinghouse $3 million a year in local tax breaks for 15 years, the report said.

The Good Jobs First study claimed the tax breaks played no role in Westinghouse’s decision to expand in Cranberry and “bypassed the opinion of taxpayers.”

But “taxpayers were not able to weigh whether the incentive had to be so large, or whether alternative investments in the engineering and technical talent that supports the nuclear industry might have had a higher payoff,” the study said.

The Good Jobs First report also was critical of the $242 million subsidy North Carolina gave to Dell to induce the computer maker to build a plant, which last year Dell decided to shut down after only four years of operation.

In response to the report, Pennsylvania officials defended the use of tax incentives to spur development. Gary Tuma, Gov. Ed Rendell’s press secretary, told the Wall Street Journal that roughly $7 million in incentives offered Westinghouse resulted in an overall investment of $450 million.

“That’s quite a strong return on our investment there,” Tuma told the WSJ. However, he added that Pennsylvania would use the Heinz-funded study “to see how we can maximize the return from our economic development investments and see if there are any policy adjustments that are warranted.”

Vaughn Gilbert, a spokesman for Westinghouse, told the Journal: “Without question the incentives were important. I think Pennsylvania really stepped up to the plate and that’s a big reason why we chose to stay here and expand here.”

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