Local Politics: Tax incentives aren't “free money”

Rob Moore
Alex Timm, CEO and co-founder of Root

City Council recently voted to provide about $3.4 million in tax incentives over the next six years to Root Insurance, Columbus's digital auto insurance tech “unicorn.”

While the spectacle of last year's Amazon HQ2 bidding war has soured many on economic development incentives, such incentives can still be helpful for cities looking to entice businesses. Incentives are not costless, though, and companies like Root don't take relocation lightly and may have stuck around without incentives. Foregone tax revenue spent on incentives is revenue not spent on local programs like safety, education and infrastructure.

Upjohn Institute Economist Timothy Bartik published a report last year that sheds some light on this tradeoff. He found that incentives tend to boost local wages as a whole, though the impacts are usually regressive, accruing mainly to high- and middle-income workers and decreasing wages for low-income workers because of decreased revenue for programs to support them.

Bartik's study provided some insights for policymakers interested in boosting local wages through economic development incentives. Let's see how the Root deal stacks up to Bartik's findings.

Most importantly, Bartik found that customized services such as job training and manufacturing extension partnerships can affect location and expansion decisions 10 times as much as tax incentives. These incentives are also progressive since low-income workers get jobs at local businesses providing this support. Unfortunately, the Root deal is being paid out through tax incentives, so Columbus was unable to fulfill this best practice.

Also important is targeting firms that utilize local suppliers and create jobs locally. Manufacturing firms are especially good at this, inducing as many as six local jobs for every direct job they create and indirectly creating jobs for low-income workers, making incentives for manufacturing more progressive than your average incentive.

Insurance company incentives are also more locally stimulating than average, but only create about 3.5 jobs for every direct job created, according to estimates by economist Josh Bivens. This means the Root deal does moderately well on this metric, though it falls short of a deal for a manufacturing plant.

Another tool is to front-load tax incentives in the first year. This takes advantage of the fact that private firms are more shortsighted than the public sector, making the incentive stronger. Unfortunately, the Root deal will be paid out through income tax abatements over the next six years, so Columbus did not take advantage of this difference.

All in all, the Root deal will probably grow local wages, though the wage growth will largely go to high earners. This will be paid for out of $3.4 million in foregone tax revenue that could pay for pre-k slots, police officers and road maintenance. While everyone wants a unicorn in their stable, we shouldn't forget where its hay comes from.

Rob Moore is the principal for Scioto Analysis, a Columbus-based policy analysis firm.