It’s no longer news that business incentive programs are controversial. A landmark New York Times investigation back in 2012 found that state and local governments gave up more than $80 billion each year to companies. Further back but closer to home, a 2008 report from Minnesota’s Office of the Legislative Auditor concluded that the now-defunct JOBZ program lacked oversight and gave subsidies to businesses and communities that didn’t really need them.
But even those critical looks allowed that job creation is a worthy end. Now, legislators a couple states away are questioning whether that’s always the case, and the questions they’re asking are worth importing to our own state.
Some Wyoming lawmakers concluded that new jobs a business wants the state to subsidize would actually hurt the budget. Their conclusions came after seeing eye-popping numbers about taxes paid compared to government services used. According to nonprofit news site WyoFile:
- A Wyoming family of four pays about $3,000 in taxes but gets about $30,000 in services.
- Four students enroll in school for every 10 people who relocate to the state. While those students cost a combined $60,000 a year to educate, the workers cumulatively pay only $10,000 in taxes, creating a $50,000 shortfall.
To be sure, Wyoming’s tax system is an outlier. It has no individual or corporate income tax and among the lowest sales and property taxes. Those low taxes are offset by taxes on coal, natural gas and oil industries. Severance taxes account for about a quarter of the state’s revenue, and the industries’ share climbs as high as 65 percent when their portion of property and other taxes are factored in.
Minnesota doesn’t have that luxury; it relies on individual income taxes for about 52 percent of its general fund revenue. By relying more on individual taxes, our state should have a much easier time breaking even with new workers. The problem is we don’t know where that break-even point is.
Granted, Minnesota does have wage requirements for many of its programs. Some examples:
- Minnesota Investment Fund: Prevailing wage rates for projects that receive $500,000 or more in MIF assistance.
- Greater MN Job Expansion Program: At least 120 percent of the federal poverty level for a family of four. For 2017, this is $29,520 per year or $14.19 per hour.
- Minnesota Job Creation Fund: Starting least 110 percent of federal poverty guidelines, or $12.85 in wages and benefits in 2017. Benefits increase for higher wages. Projects that receive $200,000 or more must pay prevailing wages.
But these minimums are generally framed as ensuring a reasonable living wage for the employees. While that’s a laudable goal, it has nothing to do with whether jobs strengthen or weaken the state’s budget. The Job Creation Fund, for example, provides incentives for wages as low as $26,837 annually — for which a single taxpayer would likely pay less than $900 in state income taxes. That’s a suspiciously low amount for a program that ostensibly makes Minnesota financially stronger. Even prevailing wage requirements could — at least theoretically — lead to a shortfall in certain cases.
Good Keynesians might counter that government has a role to play in job creation even when it doesn’t immediately benefit the government’s tax revenues — “priming the pump,” to use a phrase our president “came up with.” There might be some merit to that argument … if we were in a period of high unemployment. But we’re not. Minnesota’s unemployment sits at a scant 3.8 percent. Economists now agree we’re close to full employment. In such periods, finding workers for existing jobs should take priority over subsidizing new job creation. And demographic changes mean demand for workers is likely to be a pressing issue for years to come.
None of this is to say we shouldn’t care for struggling Minnesotans; a reliable safety net is crucial from both a moral and governance standpoint. But there’s a big difference between supporting our state’s vulnerable and actively competing to attract jobs whose costs outweigh their benefits. Unsustainable job creation only makes it harder to help those in need by further stressing Minnesota’s limited resources.
The point is not that Minnesota’s job creation programs are unilaterally bad. Rather, it’s that we don’t have sufficient, widely available information to even make that determination. We’ve focused so much on the qualitative question of what wage workers at subsidized businesses deserve that we’ve ignored the easier-to-answer question about where we need wages to be for the state to actually come out ahead.
What we need is:
- A regularly updated, publicly disclosed wage level (adjusted by location) that approximates the point at which employee- and employer-paid taxes equal the share of government services used. More than half of the general fund revenue comes from personal income tax, and individuals pay a significant share of the sales tax, which makes up about a quarter of revenue. So the employee-paid taxes should make up the lion’s share of the calculation.
- Data on trends for non-taxpaying household members likely to accompany new workers. The wage level should then be adjusted to reflect costs from non-taxpaying members accompanying new workers, albeit only in proportion to the numbers likely to come along with the new jobs. As noted above, for example, Wyoming had four students for every 10 new workers.
- Prohibitions on state job creation incentives for positions that cost the state more than it generates in tax revenue. In addition:
- Incentives intended to encourage capital investment or R&D should account for any low-paying positions that will reduce the benefits to the state.
- Jobs programs targeted at special Minnesota populations should be allowed below the break-even point where that makes sense, but they should be part of the Department of Human Services to better reflect their core competency. These programs focus on helping individuals lead more fulfilling, productive lives. Although that aim often converges with economic development goals, that isn’t inherently the case. Pretending otherwise undermines both our economic development strategy and the populations served by these programs.
- Training programs for Minnesotans should be exempted from this prohibition as an investment in the quality of the state’s existing workforce.
Organic job growth is great, but our standards have to be much, much higher when we pay for jobs. The positions can’t just pay a living wage; they also have to leave the state better off than it would be without them. Minnesota needs a better accounting of when that’s the case.
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