Counting the Cost of Creating Jobs

In a public opinion survey earlier this year, the Public Affairs Research Council of Alabama (PARCA) found that Alabamians rate jobs and the economy as the most important issues facing the state. The governor and Legislature are focused on ways for the state to encourage job creation and are considering a number of proposals. 

Many of these proposals involve new kinds of tax credits or incentive payments to businesses that make investments in Alabama. For example, under one bill, the governor could allow an investing company in a qualifying industry to keep as much as 90 percent of the state income taxes withheld from its employees until it recovered the cost of its investment. Other bills would create or increase incentives for investments in research and development activities, data processing centers, coal mining, historic structures and film productions.     

What would be the cost of these tax incentives? How many jobs and how much state revenue would result? The fiscal notes accompanying the bills contain no estimates.

Those who favor this approach believe that the tax incentives will lead to investments that would not occur otherwise. This will produce jobs and economic development, and the tax incentives will more than pay for themselves through the income and sales and other taxes that result. However, others believe that tax incentives often go to companies that would invest in Alabama anyway; in such cases, giving a tax benefit creates a loss of tax revenue rather than a gain. 

The truth is whether the state gains or loses revenue from tax incentives depends on the project. It makes sense for the state to limit incentives to projects that have the best chance of being profitable. 

PARCA studied Alabama’s tax incentive programs several years ago. It found that it was possible to identify the kinds of projects most likely to be profitable to the state in terms of the new tax revenue they would create. It suggested that the state limit its tax incentives to such projects. The proper place for such limits would be in the law governing the tax incentive. Some of the proposed bills have limits of one kind or another to minimize the chance of losing tax revenue.

EDITOR’S NOTE — Jim Williams is executive director for the nonprofit, nonpartisan Public Affairs Research Council of Alabama. Jim may be contacted at jwwillia@samford.edu.