Study: To fix economy, invest in roads and schools, not tax breaks

While a new academic study finds that New England states can best grow their economies by choosing infrastructure and education investments over business tax breaks, Connecticut’s gubernatorial candidates say it could take a mix to revitalize the state.

The report, written by a research professor at the University of Massachusetts Political Economy Research Institute, concluded state and local infrastructure projects are particularly effective at creating jobs, both in the short- and long-term, while the bulk of jobs reportedly produced by tax incentives would have been created regardless of these policy changes.

“Instead of trying to lure firms with deals and lower corporate taxes, an approach to economic development that builds the skills of the current and future workforce, improves the physical infrastructure of regions and makes communities more attractive places for families and firms represents a more effective use of a state’s scarce resources,” Professor Jeffrey Thompson, a specialist in labor economics and public finance, wrote in his report.

Infrastructure investments are particularly beneficial for New England, where the roads, bridges, ports, water treatment facilities and energy production and transmission networks businesses rely on have suffered from state and local investments below the national average for nearly a decade and a half.

The state Department of Transportation projected earlier this year that a $926.4 million gap exists between the cost of planned highway, bridge and transit projects for the next five years, and the level of projected available funding needed to upgrade an aging, overcrowded network.

State and local infrastructure projects are particularly effective in the short-term, Thompson wrote, because the leverage additional federal aid and often private dollars, and rely heavily on local workers, equipment and raw materials.

On average, state infrastructure investments alone in Connecticut will produce 11.6 new jobs per $1 million invested, and a 20 percent match in federal spending would boost the number to 14.1 jobs, the report estimates.

The return on education and other worker skills-related programs aren’t as immediate as those tied to infrastructure, but they still offer more guaranteed results that those sought through tax incentives, the report states.

A 2003 study of community college students in occupational and vocational training programs in Connecticut and 11 other states showed their average earnings were $400 more per quarter than students who didn’t receive that training or go on to a higher level of education, Thompson noted.

Another study found training grants in Massachusetts launched just over a decade ago helped community colleges and private employers to create thousands of export-related jobs at a cost of less than $9,000 per job, he added.

By comparison, Connecticut and its neighbors shell out huge dollars annually for tax breaks, with a large portion at least partially directed toward businesses.

Connecticut has nearly $350 million in corporate tax breaks on its books, according to the legislature’s Office of Fiscal Analysis. Just over two decades ago, it had $3 million worth of corporate tax credits and exemptions.

Massachusetts has seen similar growth, jumping from $1.25 billion in economic development tax incentives in 2002 to $1.7 billion now, the Thompson report states.

But Thompson argues that the net benefit of these state credits is limited by its very nature.

“If one region lures jobs through tax incentives at a neighbor’s expense, there is no net benefit to the region or the county,” he wrote.

A 2008 study by a San Francisco Federal Reserve bank economist found that nearly all of the resulting increase comes at the expense of reduced  spending in other states, and typically leads to a pattern of competing, reciprocating incentive programs between neighboring states.

Both of the major-party candidates in Connecticut’s governor said they largely agree with Thompson that tax incentives should not be a primary tool, but added they aren’t ready to leave it out of the tool box entirely.

“Generally these ideas for offering tax incentives for companies to come here or stay here too many times turn out to be not such a good investment.” Republican Tom Foley said. “We already have a lot of assets here.

Foley carved out one important exception, and that was to offer no credits to small businesses, a group he has argued is both struggling and crucial to the state’s economic recovery.

Democrat Dan Malloy expressed similar reservations, adding that tax incentives could drain crucial resolves needed to bolster other programs such as transportation enhancements.

But Malloy said Connecticut still has to make some strategic investments, such as offering both incentives and developing “first class research facilities” at locations like the University of Connecticut Health Center, to promote stem cell research and other cutting-edge bioscience technologies.

Third-party candidate Tom Marsh, is reluctant to back any tax incentives. “I’m not a big believer in offering special incentives to businesses,” he said. “It kind of creates a fake economy.”

But Marsh found common ground with both Foley and Malloy in agreeing Connecticut’s next governor must review all of the existing business tax breaks, including more than $3 billion in sales tax exemptions.

Those that are not protecting jobs and providing necessary relief to a broad base of consumers need to be repealed, Marsh said.

Connecticut Business and Industry Association economist Peter Gioia, and UConn economist Fred V. Carstensen, who heads the Connecticut Center of Economic Analysis, also cautioned against any blanket ban on tax incentives.

“You need to create an aura of certainty and confidence in the business community,” Gioia said, adding that doesn’t necessarily require adding new tax breaks, but it does involve controlling government spending and avoiding tax hikes, adding that cancelation of a wide array of existing breaks would be viewed as a tax increase by another name.

Carstensen said that while investments in transportation and education are crucial to Connecticut’s economic future, poor decisions can be made in these areas as well.

State government has invested billions of dollars since the mid-1990s on capital projects at state colleges and universities but Carstensen said it has allowed spending on academic programs to dwindle over the same period.

“We have fewer faculty (at UConn) now than we did in 1995,” he said. “We have an engineering school that is woefully inadequate compared to the needs of the sector. It’s all about making smart investments.”