Shutting Down Tax Credit to Lure Businesses and Create Jobs

Some state governments seeking to plug yawning budget holes are shutting down tax credit and incentive programs that are supposed to lure businesses and create jobs.

The main driver behind the cutbacks and those in the works is the budget crunch, but such programs have also come under fire from critics who say special tax policies have little bearing on businesses hiring or investment decisions.

In New York, Gov. David Paterson, a Democrat, has proposed deferring dozens of business tax credits for three years, while Missouri Gov. Jay Nixon, a Democrat, wants to reduce the amount of tax credits developers get for restoring historic buildings. A new Oregon law scales back credits given to certain renewable-energy projects. Iowa Gov. Chet Culver, a Democrat, signed a new law that halts tax credits to filmmakers and reduces other economic development lures.

Tax credits are an easy target for governors and legislators looking to close ongoing budget gaps caused by falling sales, income and other taxes. Eliminating or reducing such credits can boost a state's coffers without creating new taxes or raising them on broad swaths of the population.
But hurdles remain to passing these rules as critics, such as business organizations and economic-development officials, say that removing targeted tax credits will crimp hiring and investment at a time when the economy needs both.

States collected $686 billion in tax revenue in 2009, down 11.4% from the year earlier. Their costs, meantime, are skyrocketing: Investment losses have forced many states to make added contributions to pension funds, while the recession and recovery has increased demand for social services such as food stamps and health care.

To plug their budget gaps, states have cut employees, benefits and in many cases raised taxes. Amid that backdrop, a more-skeptical eye toward tax breaks was inevitable. Indeed, some states are going the other direction. Minnesota's governor recently signed a bill with various tax credits, including a break for so-called angel investors who put money in young companies. Meantime, the move to curtail tax credits and other economic-development programs has opened a window for critics who say such programs are largely ineffective.