What Price the Free Market?

Business Incentives Under Legislative Examination

“Would those 45 companies have been here in Nebraska without the investment credits?” asked Kearney Senator Galen Hadley, Chair of the Revenue Committee. "When you cut through everything, this is what you get to.”

The Legislature’s Revenue and Appropriations Committees met August 30 looking for the answer to a persistent question: Do Nebraska’s business incentive programs work? If so, how well do they work?

Senators were walking where their own Performance Audit Committee, chaired by Scottsbluff Senator John Harms, had walked earlier. In February, the Performance Audit Committee had found that “program goals … are too general to permit a meaningful evaluation of whether the programs are, in fact, accomplishing what the Legislature hoped they would accomplish.”

Senators heard from Tax Commissioner Douglas Ewald, head of the Department of Revenue. He presented exactly what was required under a process senators had modified with LB 612 in the last session.

The committees were hoping to wring insight from the Department of Revenue report on the seven separate business incentive programs now operating in Nebraska. Most attention was paid to the now ended “Employment and Investment Growth Act” (better known as LB775) and the reformed Nebraska Advantage Act that followed it in 2006.

Business interests had lobbied for the old 775 program to operate confidentially and very little was known by the Legislature or the public about how the program was run. Over the years, more information emerged and with the successor Advantage Act, the process is explicit and considerable data is available.

LB 775 created 1,625 full-time jobs at a cost to the state of $114.8 million in lost revenue, approximately $70,670 per job.

Under the Advantage Act, 195 agreements have been signed with the State, 58 of them in 2012. But, as Commissioner Ewald explained, the program is “performance based.” Companies first apply, then, if they meet criteria under one of six tiers of the program, they qualify and sign a contract. Qualified operations must pass an audit demonstrating that they have performed as agreed before receiving tax credits.

Of those that apply, 47 percent don’t qualify, Ewald said. Of the tax credits earned in the program, 25 percent expire unused.

Between 2006 and 2011, 45 companies invested about $3.5 billion in Nebraska . They earned and used $44 million in credits with $313 million in tax credits left to use, creating 7,103 jobs at a final cost of $50,260 per job if all the credits are used.

But the data do not answer some of the legislators’ best policy questions. “Which companies have the greatest growth—those that qualify for the program or those that don’t?” Senator Schumacher asked Ewald. “What was the investment of unsubsidized businesses in the state.”  These are research questions Ewald deems outside his scope.

Omaha Senator Jeremy Nordquist, wondered aloud about redirecting the money spent through the relatively high overhead Advantage Act to just lowering the corporate income tax. “How soon would we be able to? How far forward do the current contacts run?” he asked. “Ten to 15 years,” said Ewald.

Omaha Senator Pete Pirsch asked Ewald if he was familiar with recommendations of the Pew Center. Ewald said no but the Pew Center has issued two reports in the last year, “Avoiding Blank Checks,” and “Evidence Counts,” that suggest  techniques such as explicit objectives, cost estimates, built-in cost controls and planned program expiration, each at some point in the process of writing tax incentive legislation, all before laws are passed.

In Nebraska, the Open Sky Policy Institute has been active in bringing these documents and other tools to the attention of senators and the public. “It was obvious from the discussion that there are many questions that need to be answered to help the state get a handle on how its subsidy programs are working,” said Executive Director Renee Fry. “This morning’s hearing was a good first step toward understanding if the millions we spend on these programs are working as they should. We hope this process will lead to a better assessment of our state’s investments in its subsidy programs.”

Senator Harms drew on his experience as Chair of the Audit Committee to say, “Senator Schumacher’s questions are being asked across the United States. Very few of these programs have benchmarks written into the law.” He said that the Audit Committee would be issuing a second report in a week and then they would release “our final report—in depth.”

posted at 11:35 am
on Sunday, September 01st, 2013

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