Tax cuts and incentives are the wrong ways to draw jobs

In an effort to stop hemorrhaging jobs and residents, Philadelphia and other economically distressed communities have embraced a flawed formula for prosperity: tax cuts and tax-incentive packages. "If we reduce the tax burden on businesses," the reasoning goes, "then companies will beat a path to our city, jobs will be created, people will come back, and all will prosper."

Sounds good, but the cut-taxes-to-grow-business approach is all wrong. Hundreds of studies confirm that local taxes are not a significant consideration when businesses decide where to locate and invest. Far more important are availability of qualified workers, proximity to customers and business markets, and access to raw materials and supplies. Public services also matter, including schools, transportation, health care, police and fire protection, recreational and cultural amenities, and institutions of higher education.

Tax-cut incentives undermine government's ability to provide services and can help destroy jobs. Every private-sector job "created" by tax cuts costs government tens of thousands of dollars in revenue. That revenue loss will force service cuts and layoffs of public employees in numbers that are likely to exceed private-sector job gains.

Philadelphia can expect to experience a net loss of city jobs if it moves forward with proposals to cut business taxes. In fact, the job cuts have begun, with layoffs to affect about 200 municipal employees.

Business-tax cuts are an inefficient economic development tool. For every dollar cut in city taxes, a business will realize a revenue increase of only about 60 cents. The rest goes to the federal government and elsewhere, because city taxes are deductible. Research shows that businesses may invest only part of the tax cut they receive, and not necessarily in the community that gave the tax break. So the public-spending reduction caused by the tax cut isn't necessarily "replaced" by private investment. That means slower economic growth in Philadelphia and potentially more job loss.

It's widely assumed that the burden of city taxes can make businesses unprofitable, yet Internal Revenue Service data indicate that all state and local taxes paid by companies add up to less than 1 percent of the cost of doing business. City taxes are just a fraction of this, but they are the way businesses pay for benefits they receive from city government, such as educated workers and police protection. When business tax "breaks" trigger public-service cuts, companies may have to pay more for employee training or workplace security. Without adequate taxation, expected public services can become an internal expense to businesses.

Gov. Rendell talked about the "race to the bottom" tax-cut competition recently with leaders from Pennsylvania, New Jersey and Delaware. Instead of competing with one another for jobs, Rendell proposed that the three states sign an agreement to stop using tax incentives to "poach" jobs from one another - a smart idea.

The same problem affects Philadelphia and its suburbs. If King of Prussia lures a company away from the Center City, that's job shifting, not job creation. When jobs move around the five-county area because of tax cut incentives, the entire region loses because local governments collectively have less tax revenue, forcing service cuts or tax increases.

Instead of wasting money on tax incentives to business, Philadelphia should invest: in schools, in good roads, in public safety, in clean streets - and in public transportation. The current scramble to stabilize SEPTA should be viewed as a business-retention and job-growth strategy, not just a bailout for public transit.

The best way to lure businesses to Philadelphia is to make the city an attractive place to live for the highly educated, well-trained workers 21st-century companies need. Investment in public services, especially in education and infrastructure, will spur economic growth, influence business location decisions, create jobs, and attract people.

Cutting taxes and gutting public services will never accomplish that.

This op-ed is adapted from remarks made by Dr. Robert G. Lynch (rlynch2@washcoll.edu) at a November forum on tax-system changes, sponsored by Philadelphia Citizens for Children and Youth. Lynch is chairman the Department of Economics at Washington College in Maryland and the author of "Rethinking Growth Strategies: How State and Local Taxes and Services Affect Economic Development."