In the competition to win new jobs, tax breaks for companies cost Ohioans at least $63.1 million last year in foregone tax revenues, according to state government budget projections.
While millions in tax breaks were awarded, Ohio businesses grew payrolls by 43,100 jobs, according to state estimates.
“The benefit outweighs the cost in every instance,” said Daryl Hennessy, chief of the Business Services Division for Ohio Development Services Agency.
Incentives are necessary for Ohio to be competitive against other states with no income tax, such as Florida, Tennessee and Texas, said Doug Moorman, vice president of Development Strategies Group LLC, said. The Cincinnati consulting firm is hired by businesses to find and negotiate financial incentives.
And incentives like tax credits help a company decide on Ohio as the place to bring economic impact — even if the company isn’t paying 100 percent of its tax bill. The state doesn’t lose any revenue to pave roads, for example, because it is revenue Ohio wouldn’t get otherwise, Moorman said.
Tax credits are important for some companies selecting a site, but a talented workforce, geographic location and quality of life are more important factors, Moorman said.
“You’re competing not just for jobs, but you’re competing for talent around the United States and around the world,” he said.
An Ohio Department of Taxation report shows that since 2012, state government is foregoing an increasing amount of money for tax credits to businesses that promise to create and retain jobs. The value of these incentives grew from $55.7 million that year to a projected $65 million this fiscal year 2015, according to taxation department estimates.
“The overall improvement of the economy has led to more projects,” Moorman said.
“I think companies are always looking for the best deal they can get. It may be a little more acute now because of the recession and what companies endured during the recession,” he added.
Ohio 3rd in ‘megadeals’
The criticism against tax credits is that the largest corporations are leveraging a still-recovering economy to get bigger breaks, said Greg LeRoy, executive director of Good Jobs First, a Washington think tank.
Ohio ranks third nationally, tied with Texas, for the number of “megadeals” awarded companies in tax subsidies, according to a 2013 report by Good Jobs First. The group identified 240 tax incentive packages that cost at least $75 million apiece over the past 35 years.
Michigan has awarded 29 such deals, New York has done 23, and Ohio and Texas have done 12 each.
It was also found that since 2008, the average frequency of these “megadeals” per year doubled compared to the previous decade.
“There’s no way to prove or disprove the idea that the company is making this investment because of the tax credits,” LeRoy said.
Economic development is so competitive that one local expert compared it with going to war.
Tax credits, low-cost loans, grants and other incentives offered by state and local governments to companies are among the weapons in their arsenals.
“You can’t unilaterally disarm because new jobs and new tax revenues to the local community are so important if you don’t participate and you don’t offer these kinds of things, there are hundreds of communities across the country that are willing to participate,” said David Smith, a member of the Ohio Tax Credit Authority.
The authority, an independent body of appointed business and government leaders, votes whether to approve state-funded job creation and retention incentives offered to companies.
How it works
Job creators are expected to claim $63.1 million in state job creation and retention tax credits and credits for research and development costs during the budget year that ended June 30. Credits are claimed against their Commercial Activity Tax bill.
It is not the same as saying Ohio would collect $63.1 million if the companies did not receive the tax credits, because in that case, it’s unknown whether the business project would generate the same revenues.
Also, the $63.1 million is just the state budget impact. Local governments often give companies additional incentives in the form of low-cost loans, property tax abatements, earnings tax credits and other incentives.
To be eligible for state-level tax credits, projects must add a minimum of $660,000 a year in new payroll to Ohio; be economically sound; and tax credits must be a major factor in a company’s decision to move forward with a proposed project in the state, said Hennessy, of Ohio Development Services Agency.
The terms — percentage level and length (years) — of an incentive deal are determined by the number of jobs to be created, jobs retained, wages, capital investment, location, local incentives, and other factors.
Typically, retail, restaurants and health providers do not qualify.
When the state awards a tax credit or other financial assistance to a company, officials are looking for companies to generate a return on the public investment by adding payroll and investing money in land, buildings and equipment. Hopes are new employees will spend money on coffee, houses and cars that generate more sales tax revenues.
“Sometimes the return does not warrant the level of state assistance,” Hennessy said.
Credits can only be used if jobs are actually created, according to Ohio Development Services Agency.
A private, nonprofit agency — JobsOhio, which was established by Ohio Gov. John Kasich’s administration in 2011 — negotiates with taxpayer money on deals with companies.
JobsOhio replaced economic development activities of the public Ohio Department of Development, since renamed Ohio Development Services Agency.
JobsOhio leads efforts to recruit companies to Ohio, and sometimes leads negotiations on tax and other financial incentives with prospective companies. Any incentives negotiated are recommended for approval to Ohio Development Services Agency, which reviews it. Then Ohio Tax Credit Authority votes on it.
JobsOhio and Ohio Development Services Agency meet regularly to discuss ongoing projects, said Thomas Seward, project manager for JobsOhio.
Moreover, JobsOhio has a revenue stream from which it can offer its own financial aid to companies. The development organization signed in 2013 a 25-year lease, paying $1.4 billion for the rights to Ohio’s wholesale liquor profits.
“At the end of the day a negotiation isn’t worth very much if the tax credit authority doesn’t approve it,” Seward said. “It’s our job to put together a package that wins jobs for Ohio but that maintains a strong return for the state.”