Business Tax Breaks Take
Some Heat in California

When you are hunting for revenues to make ends meet, any revenue source is fair game. That appears to be the situation in California and some other states where business tax credits and economic development incentives for business have come under fire as states look for ways to fix their ailing budgets. The independent California Budget Project (CBP) issued a report recently that casts doubt on whether the business tax breaks are truly aiding California's economy.

"Little or no attention has been paid to whether the billions of dollars the state spends each year to promote a healthy economy are achieving their desired result," the CBP study says.

"While recent policy debates around issues such as education have focused on accountability and performance standards, no similar standards have been applied to state spending for economic development," the report concludes. The state now allows at least $5.5 billion annually in tax "expenditures" -- or breaks -- aimed at economic development, according to the California Budget Project. The state has added or expanded more than 25 such tax expenditures since 1990, bringing the total to about 75.

Business and economic development advocacy groups counter that California is among the most expensive states in the country to do business and without these tax credits and incentives, the state's economy would suffer a significant loss of competitive advantage.

The California situation points to the growing necessity for economic development organizations everywhere to arm themselves with better facts about the economic costs and benefits of their programs. We need to work much harder at making our programs more performance-based. All programs have both benefits and costs. Some of these impacts can be measured in a quantitative way, while others cannot. If programs cut the mustard and produce more benefits than costs, they should be continued. If not, they should be done away with.

During this time of higher than usual risk and uncertainty, everyone, including businesses, are looking for a safety net to soften the fall during tough economic times. At the time when we need this net the most, we are least able to provide it. That seems to be the message coming from many states from what we can see.

Go here to read the recent Oakland Tribune article on the California situation. You can find the California Budget Project report here. You may find it useful to contact the California Association for Local Economic Development (CALED) to find out what role they are playing in the current California debate. You can find the CALED website here.