Topic: Miller College of Business

November 26, 2013

The main tax incentives offered by the Indiana Economic Development Corp. (IEDC) have performed well for the state, but local tax abatements are far less effective, says a new report from Ball State University.

An Analysis of State and Local Tax Incentives,” a study by Ball State’s Center for Business and Economic Research (CBER), authored by Dagney Faulk and Michael Hicks examined actual job creation effects of incentives offered through the IEDC from 2005-2012. The study made use of the actual reported history of incentives and the reported jobs created from the U.S. Bureau of Labor Statistics.

“The presence of the Indiana Economic Development Corporation positively impacted job growth,” said Michael Hicks, CBER director who co-authored the study with Dagney Faulk, CBER’s research director. “While the study found the IEDC was effectively using tax incentives, we have found some problems with local tax abatements that should be addressed.”

IEDC is the state’s lead economic development organization. Established in 2005 to replace the former Department of Commerce, it operates as a private agency to respond quickly to the needs of businesses.

Hicks said analysis found the EDGE credit, a tax credit made available based upon verifiable employment reports, has performed well for Indiana, with each $1,000 invested resulting in an additional manufacturing job.

Research determined that local tax abatements in Indiana have been far less effective, with about $30,000 in lost local tax revenue required for each new manufacturing job created, he said.

The study found that local governments abated $50.78 billion in property value through the study period or about $8.5 billion per year. At a 3 percent property tax rate, that is about $253 million in lost property tax revenue per year or about $2.75 million per county per year.

The study also said the impact of the Hoosier Business Incentive tax credits and Skills Enhancement Fund could not be readily analyzed because more time must pass before their effects on investment and wages can be estimated.

Hicks pointed out that a number of states share specific economic or infrastructure characteristics that make them likely alternatives to Indiana for business expansion or relocations, Hicks said.

“Clearly, many of the same types of major tax incentive programs exist in other states, though there are sometimes very large differences between states,” he said. “Indiana’s EDGE credit is the most common type of program, with similar job creation-related obligations for recipients.”

The study has several recommendations, including:

  • Promote the creation of Regional Development Authorities (RDAs) covering all Indiana counties. The study found that job creation in locations with an RDA is significantly better than in those counties without one. Counties with an RDA have higher levels of total and manufacturing employment. 
  • Continue with the EDGE credit as currently designed. The study found that the largest of Indiana’s tax incentives appears to create a significant number of jobs in areas where the credits have been deployed. 
  • Monitor the Hoosier Business Incentive Tax Credits and Skills Enhancement Fund and re-evaluate them when sufficient data becomes available to fully assess their impacts. 

Hicks also recommends a review of state-enabling legislation regarding local tax abatement levels. 

The study found that local governments abated $50.78 billion in property value over the study period, or about $8.5 billion per year. At a 3 percent property tax rate, that is about $253 million in lost property tax revenue per year, or about $2.75 million per county per year, which should be considered the top level.

“The effectiveness of these incentives is very poor relative to the most successful state tax incentive, and costs up to $30,000 per manufacturing job created. We have not explored the reasons behind this very large incentive payment from local sources. However, the magnitude of the total abatements, and the high cost per job created, argues for significant policy consideration.”

This is the second study on the IEDC conducted by CBER. In an earlier study, CBER examined the managerial organization of IEDC, the role of different types of activities and provided recommendations on such matters as website tools, the creation of an ombudsman and the adoption of an EB-5 visa assistance program.