Recently a Philadelphia Inquirer reporter reached out to the Economy League to discuss Governor Shapiro's economic development agenda, specifically the incentive programs he's been touting in deals with companies such as Burlington, Urban Outfitters, DrinkPAK, and TerraPower.

This led me back to my days as Policy Director in the Office of the Philadelphia City Controller when I was asked by then-Controller Butkovitz to dive deep into the costs and benefits of Pennsylvania’s largest, highly-touted tax incentive program, the Keystone Opportunity Zone program. In 2014 Controller Butkovitz released a study that found, in addition to unsubstantiated claims about the economic benefits of the KOZ program, incredibly lax or nonexistent accountability mechanisms.

Nationally, place-based, discretionary tax incentive programs have exploded since the 1990s, amounting to tens of billions of dollars in local economic development spending. Academic researchers have highlighted the trade-offs between targeting and discretion and the tension between efficiency and equity.

Some incentive programs target specific firms, most famously Amazon’s $750 million package from the Commonwealth of Virginia, raising questions about whether elected officials ought to be picking winners, while others provide blanket relief for all firms in a specific “distressed” zone, with some discretion over what zones get chosen, or that produce certain types of investments or jobs. Questions are also being raised about the beggar-thy-neighbor effects and the negative externalities for “losing” locations.

What should taxpayers be asking before public dollars are used to convince a company to move?

So, as I prepared for the Inquirer interview, from my current perch as the Executive Director of the oldest research organization in the region, with an explicit mission of fostering equitable and inclusive growth and a commitment to non-ideological research that obsessively follows the facts, I encouraged the reporter to consider some of the following questions that organize our critical thinking about tax incentive programs in general.

Elected officials often declare victory if a firm moves from one part of a metropolitan region to another, as if jumping a political boundary that has little relationship to the contours of a regional labor or consumer market creates new value.

In general, inducing a firm to move from one part of the region to another is not growth activity, but more likely zero-sum for the region.

Creating 2,000 new jobs in Philadelphia is wonderful for Philadelphia, and as a city dweller, I am tempted to express Philly pride over the acquisition of the Burlington Stores corporate HQ, for example. I am thrilled that the burgeoning Schuylkill Yards and UCity district will continue to add density, that the company is committed to incentivizing its employees to use SEPTA, etc.

But what about the commensurate loss to our regional compatriots in Burlington, NJ? Eventually the old corporate HQ will empty out, the tax base of the small town in which the HQ is currently located could suffer, as will the families who depended upon that work.

Will the HQ campus be repurposed, or will it lay fallow for years, depressing property tax ratables? Will the displaced Burlington County workers find new employment? And what is the nature of the jobs created in Philadelphia? Are they quality jobs that pay family-sustaining incomes, with career ladders?

Many of the corporate relocation announcements tend to focus on the transactional nature of “the deal,” as if it is taking place in isolation and unconnected to any sort of regional growth agenda or strategy.

How do individual deals relate to broader economic development strategies, assuming such exist? And do the incentives employed, particular types of tax credits, for example, incentivize corporate behavior that maximizes benefit for the regional economy, its workforce, and its local governments?

In Greater Philadelphia, a new strategic alignment was recently announced between the City of Philadelphia and its four suburban collar counties, the Greater Philadelphia Growth Partnership.

While a sizable step in the right direction, the Partnership still operates according to the fiction that economic forces respect state lines, with no representation from southern New Jersey or northern Delaware, two important parts of the Greater Philadelphia metropolitan area, which comprise the actual regional economy and labor market.

Ironically, just weeks after the Partnership launch and the acknowledgment that regional cooperation and collaboration is critical, the Burlington announcement suggested that it’s still winner-takes-all in this region.

I have yet to see a growth strategy that is truly regional.

One of the most astounding findings from the research I did 12 years ago into the KOZ program was how little accountability was baked into the program.

When we asked the KOZ administrator in Harrisburg to provide copies of reports demonstrating that firms had created new jobs in return for tax breaks, we were told that the Commonwealth did not collect such information, and that we’d have to ask our local KOZ administrator for that data.

When we did, we learned that every data point was self-reported, that participating companies were not asked to verify how many jobs they had created, and worse, that there were no consequences for non-performance.

When we finally got access to the business tax returns for all of the companies involved in the KOZ program in Philadelphia, our analysis showed that 3,600 net new jobs could plausibly be attributed to the $400 million in tax incentives, equating to roughly $105,000 per job; once the KOZ subsidy ended, it would have taken something like 50 years to make the city and state whole for lost tax revenue.

Most importantly, from our point of view, there was no mechanism for clawing back incentives from companies that had clearly underperformed expectations yet still received generous benefits.

In short, there was no sense that this was a reciprocal deal or contract.

From a policy perspective, a tax incentive ought to be tied to broader policy goals, for example attempting to redress the radically inequitable distribution of income and opportunity within and between regions.

According to the Opportunity Atlas, Greater Philadelphia has among the lowest rates of social mobility of any metro.

Smart development policy ought to require companies to commit to producing quality jobs and a foot on the career ladder for those who have either historically been marginalized or for “second chance” populations like the formerly incarcerated or addicted, in return for tax benefits.

And finally, how does the taxpaying public know that its funds, in the form of tax credits, are working as promised?

If we are spending $25–40 billion a year on incentives, how do we know they are producing the desired results? Why don’t we require that accountability mechanisms be built into the “deals” or the policies, such as periodic independent audits or impact analyses?

Are these net new jobs? Are they quality jobs? Are they the result of true expansion, or are we simply shuffling the deck chairs?

Governor Shapiro claims that his policies have created 29,000 new jobs in Pennsylvania. Are these net new jobs? Are they quality jobs? Are they due to the expansion of a company's capacity or footprint, or simply shuffling the deck chairs?

If Pennsylvania “won,” then what other jurisdiction “lost”? And shouldn’t that loss be included in the ROI calculus, especially if it is intra-regional like the Burlington deal?

In short, to quote Ronald Reagan, “trust but verify.” Taxpayers and residents ought to demand an accounting for the incentives that their tax dollars make possible.

In Sum: It’s a Mixed Bag

In short, there is some evidence that place-based tax incentives like those recently touted by the Shapiro administration can produce direct employment gains, but recent research by Princeton economists Slattery and Zindar suggests that it is far less certain that firm-specific tax incentives improve broader economic growth at the state or local level; most gains flow to firm owners and landlords rather than underemployed workers.

Policies that concentrate resources to where efficiency and equity gains are the largest have potential for larger gains, but such policies require far greater levels of regional collaboration and coordination than currently exist.

Jeff Hornstein, PhD

Executive Director
Economy League of Greater Philadelphia