GE got a pretty good deal on its new Boston home.
It comes with the best-educated workers in the country, the benefits of a university-rich research environment, and easy access to a vibrant science and technology sector.
Plus, there were perks: up to $25 million in property tax breaks, as much as $120 million for infrastructure to support the creation of a new corporate campus, and perhaps another $125 million to upgrade nearby roads and bridges.
It's impossible to say which of these tipped the scales for GE — the cash, the skilled workforce, or the burgeoning tech sector. But one thing's clear: Massachusetts can't pay every company to come to town.
To attract a critical mass of top companies, you need to create a business environment that people are rushing to join. And over the years, Massachusetts has done a pretty good job at that.
States regularly use tax breaks and public money to compete for big companies. One leading estimate puts the annual cost of these inducements above $40 billion nationally.
Michigan, for example, has provided regular and repeated incentives to carmakers to keep them from moving jobs out of state. GE's former home, Connecticut, has made a habit of wooing large financial services companies, including UBS, Royal Bank of Scotland, and Zurich Reinsurance, with tax payoffs.
Do company-specific incentives work?
Some companies probably have been persuaded to pick up and move by generous tax deals. Nonetheless, paying companies to move — or stay put — raises a number of concerns.
For one thing, it's easy to overpay because companies have all the leverage in negotiations, playing states against one another. Also, people tend to overestimate the effect one company can have on a state or local economy. GE, for instance, is expected to employ 800 people in its Boston office, whereas the Massachusetts economy created an average of 6,000 jobs each month in 2015.
Even more damning is the zero-sum nature of the competition. Whatever Boston might gain from GE’s relocation, Connecticut will lose. So viewed from the perspective of the US economy, there’s absolutely no benefit, just two states giving away public money to help ensure that jobs move from one side of a state border to the other.
Could the federal government ban these incentives?
Absolutely. In fact, preventing states from engaging in damaging economic competition with one another is one of the most basic responsibilities of the federal government, embodied in the "Commerce Clause" of the Constitution, which gives Congress the power to regulate economic relations between the states.
But there's a big difference between what Congress can do and what it will do. Despite occasional proposals to limit company-luring incentives, a ban has never gained traction.
What else does Massachusetts do to boost economic growth?
While it's relatively unusual for Massachusetts to offer a package of incentives targeted at a single company — as it did for GE — we do have a fair number of tax breaks aimed at just a few companies or a particular industry. This includes tax breaks for medical device makers, the film industry, dairy farmers, and others.
A few years ago, the Massachusetts Budget and Policy Center, a Boston think tank, found "special business tax breaks" cost the state $770 million annually.
Yet, these kinds of tax breaks have a mixed record when it comes to generating jobs and economic growth. Some research suggests that the life sciences industry has benefited from special tax treatment, but efforts to help manufacturers through other tax breaks haven't turned that sector around. And a review of the film tax credit by the Massachusetts Department of Revenue found that most of the benefits actually flow to other states.
Isn’t there more to economic development than just tax policy?
Few government activities are as economically vital as education and transportation. That's because in the long term, the only way to really grow the economy is to improve productivity.
Spending on roads and transit aids productivity by cutting down on commutes, making it easier to ship goods and get workers to their jobs. But with the T in dire financial straits, and transportation spending at relatively low levels, that's not an area where Massachusetts can claim great economic advantage.
Education, however, also boosts productivity, helping people build skills and improve problem-solving strategies. Through the 1990s, the state greatly increased the money devoted to public education, which not only helped boost test scores but also continues to pay economic dividends.
So was the GE incentive package a good idea?
Reasonable people can disagree on this.
Company-specific tax inducements are rarely a good idea. Yet, in GE's case, the amounts promised aren't especially high, and some of the money could be thought of as productivity-boosting transportation investments, helping to tie the waterfront to the downtown.
Good or bad, though, it's important to recognize that the GE deal is teeny, a small move in the broader game of economic development. GE's arrival isn't to going transform Massachusetts, and the tax incentives will barely make a ripple in the nearly $40 billion state budget.
Far more consequential is our long-term commitment to helping children learn and workers get around.
Editor's note: The writer worked for Massachusetts Budget and Policy Center when the group issued its study on business tax breaks. This was not disclosed in an earlier version.