Michael Hicks, Director of the Center for Business and Economic Research,
and Professor of Economics at Ball State University
State and local tax incentives
have little effect on business relocation
A Civic CaucusFocus on CompetitivenessInterview August 9, 2013
Dave Broden, Paul Gilje (coordinator),
Sallie Kemper, Dan Loritz (chair), Paul Ostrow, Dana Schroeder. By
phone: Michael Hicks, Clarence Shallbetter.
According to Michael
Hicks, director of the Center for Business and Economic Research and
professor of economics at Ball State University, Minnesota's grades
are average or above for eight of nine categories in the 2013 edition
of an annual scorecard of factors important to location decisions by
logistics and manufacturing firms. However, in the ninth category-tax
climate-Minnesota received a grade of "F."
The scorecard includes 50 variables lumped
into nine different categories, with every state being graded in each
category. The scorecard gave Minnesota the following grades in those
categories: "A" for human capital and for productivity and innovation;
"B" for manufacturing industry health, logistics industry health and
expected liability gap; "C" for worker benefit costs, for global reach
and for sector diversification; "F" for tax climate.
Hicks says local governments need
flexibility to find the right mix of services and amenities vs. taxes
that will attract residents. He states what he calls Hicks's law: In
the short run, households move to jobs; in the long run, jobs move to
people. He says the most successful communities have responded to what
households are looking for. Research shows, he says, that tax
incentives offered by state and local governments have little effect
on business relocation, especially for manufacturers. He calls
manufacturing businesses "footloose," because their success does not
depend on local demand, so they can choose to locate almost anywhere.
Michael J. Hicks is
director of the Center for Business and Economic Research and
professor of economics in the Miller College of Business at Ball State
University in Muncie, Indiana. He came to Ball State following stints
at the Air Force Institute of Technology's Graduate School of
Engineering and Management and research centers at Marshall University
and the University of Tennessee.
Hicks's research has focused on issues
affecting local and state economics. While he studies such diverse
issues as local telecommunication deregulation, state tax incentives
and local government consolidation, he is best known for his research
on Wal-Mart's effect on local economies. He has authored one book on
Wal-Mart and papers on the subject in the Eastern Economics Journal,
Atlantic Economics Journal, Economic Development Journal, Regional
Economic Development, Journal of Private Enterprise, and Review of
Hicks has received research and teaching
awards from Tennessee, Marshall, AFIT and Ball State, and his research
has been highlighted in such media outlets as the Wall Street Journal,
New York Times, and Washington Post. His weekly column on economics
and current events is distributed through newspapers, including the
Indianapolis Business Journal, the South Bend Tribune, and The Star
Hicks earned doctoral and master's degrees
in economics from the University of Tennessee and a bachelor's degree
in economics from Virginia Military Institute. He is a retired
infantry lieutenant colonel in the U.S. Army Reserves, having served
in combat and peacekeeping operations in North Africa, Southwest Asia,
Korea and Japan.
Ball State University publishes an annual
scorecard grading all 50 states on factors important to location
decisions by logistics and manufacturing firms.
Michael Hicks, director of the Center for Business and Economic
Research and professor of economics at Ball State University,
explained that some of the center's research results in an annual
manufacturing scorecard. The 2013 Manufacturing + Logistics National
Report is the sixth such scorecard published jointly by the center and
by Conexus Indiana, a public policy group aligned with manufacturing
and logistics in the state.
He described the scorecard as a national
report of state-level variables. In 2008, Conexus asked him to develop
an index of measures that might influence siting decisions for
manufacturing. He noted that manufacturing firms are "footloose,"
because they don't rely on local demand.
The report lumps about 50 variables into
Each state receives a letter grade (A
through F) in each category. The grades are assigned using a strict
bell curve, meaning there are as many A grades as F grades, Bs and Ds
balance off, and the rest, the highest number, fall into the C grade.
He described the categories and how they are measured and reported
Minnesota's grade on each of them:
Manufacturing industry health.
depends on local factors other than local demand: quality and
availability of the labor force, transportation infrastructure,
non-wage labor costs, access to innovative technologies and the cost
of doing business. Three variables are included in the measure of
manufacturing industry health: the share of total income earned by
manufacturing employees in each state, the wage premium paid to
manufacturing workers relative to other employees, and the share of
manufacturing employment per capita. Minnesota's grade: B.
Logistics industry health.
Logistics involves not only
the capacity to move goods, but also to store inventory and manage
the distribution and processing of manufactured goods. Logistics
firms' location decisions depend upon many of the same factors as
manufacturing firms, but also include existing or planned
transportation networks of roads, railroads, waterways and airports.
Four variables are included in the measure of logistics industry
health: the share of total state income earned by the logistics
industry, the share of logistics employment per capita, commodity
flows data by both rail and road, and infrastructure spending as the
per capita expenditure on highway construction. Minnesota's grade:
The quality and availability of labor
are the most important factors to businesses and their location
decisions, especially quality of educational background. Four
variables are included in the measurement of human capital: rankings
of educational attainment at the high school and collegiate level,
the first-year retention rate of adults in community and technical
colleges, the number of associate degrees awarded annually on a per
capita basis and the share of adults enrolled in adult basic
education. Minnesota's grade: A.
Business taxes, individual income taxes
(both on workers and small business), sales taxes, unemployment
insurance taxes and property taxes all play a role in assessing a
region's potential for employer location. Hicks pointed out that
states must pay for public goods, so higher taxes may not be a
problem if a state has other factors that manufacturers like. Data
on corporate taxes, income taxes, sales and use taxes, property
taxes and unemployment insurance tax data are used to measure the
tax climate. Minnesota's grade: F.
Worker benefit costs.
Non-wage labor costs represent an
increasingly important part of total business costs and are affected
by state and local laws, worker demographics, worker health and
performance of firms and industry. Data on health care premiums,
long-term health care costs, workers' compensation costs per worker
and fringe benefits of all kinds as a share of worker costs are used
to measure benefit costs. Minnesota's grade: C.
Expected liability gap.
Many states have failed to
provide a direct funding stream to repay infrastructure bonds or to
fully fund pension plans. These unfunded liabilities represent an
expected state fiscal liability gap, which is a good indicator of
the direction of future taxes and public services. Data on unfunded
liability per capita and as a percentage of GDP, average benefits,
and bond rankings are used to measure the expected liability gap.
Hicks said if the grade is C or higher, the state does not have a
sufficient liability claim to generate concern for businesses. He
pointed out that a state like Illinois is not nearly in as dire
straits as a city like Chicago. Minnesota's grade: B.
The level of international trade, both in
exports and imports, is a robust measure of a region's
competitiveness in the production, movement and distribution of
consumer goods. How well manufacturers make goods with a global
market appeal is an important predictor of the health of state
manufacturing and logistics sectors into the future. Hicks noted
that trade negotiations and junkets are probably minimally effective
in increasing exports, because officials are usually trying to bring
foreign companies to their state. The following variables are used
to measure global reach: per capita exported commodities and
manufacturing goods and the growth of manufacturing exports, the
amount of manufacturing income received annually from foreign-owned
firms in a state, the level of adaptability of the state's exporters
to changing demand, as well as the reach of foreign direct
investment. Minnesota's grade: C.
Productivity and innovation.
The value of manufactured
goods per worker, i.e., productivity, as well as firm access to
inventions and innovations is critical to the long-term performance
of a firm and an industry as a whole. The presence of local talent
in these areas, through access to university laboratories and
nonprofit research activities, plays an important role in location
decisions by manufacturers. Manufacturing productivity growth,
industry research and development expenditures per capita, and the
per capita number of patents issued annually are the variables used
to measure productivity and innovation. Minnesota's grade: A.
States that concentrate their
manufacturing activity in a single sector typically suffer higher
volatility in employment and incomes over a business cycle. One
potential benefit of low levels of economic diversification is that
the resulting industry clusters, such as automobiles in Detroit,
often emerge in highly specialized regions. Each state's
diversification of manufacturing activity is calculated using a
complex index. Then states are ranked from the most diverse (# 1) to
the least (# 50). An A grade means average concentration, with
grades getting lower for higher concentration. Minnesota's grade: C.
The concepts of foundational competitiveness
and investment attractiveness are good ways to think about
An interviewer asked Hicks to comment on the
way the Civic Caucus is thinking about competitiveness, that is, using
foundational competitiveness and investment attractiveness to frame
our conversations going forward. (See the Civic Caucus June 7, 2013,
interview with Mark
for an in-depth discussion of these concepts.)
Hicks said that's a fairly good way to think
about it. He noted that Paul Krugman and other economists have said
that regions don't compete with each other, businesses do, and that
trade is the antithesis of competition. Hicks said it's a far more
nuanced debate involving foundational competitiveness: how good are
our people, the skills they bring to the workforce, our housing stock,
our recreational opportunities and our schools?
Local governments need flexibility to find
the right mix of services and amenities vs. taxes that will attract
Hicks stated that households choose locations that
match a set of amenities they care about: schools, recreation,
environment and climate. They balance that with the tax rates they'll
pay. "They could find places with lower tax rates and fewer services,"
he said. "The challenge is to find the right mix that will attract
residents. It's a local government challenge."
State governments need to allow flexibility
to the local governments. "We should allow for the most federalist
taxation system, so local governments have more control over what they
spend relative to higher levels of government," he said. The evidence
suggests that the fiscal backlash around the country is not aimed at
high tax rates, but at high spending with a low quality of public
He stated what he called Hicks's law: In the
short run, households move to jobs; in the long run, jobs move to
The communities that have done best have
responded to what households are looking for.
In response to
a question, Hicks discussed exogenous and endogenous amenities.
Exogenous amenities are things that are in a location naturally:
lakes, mountains, climate, etc. They provide allure to people. But
migration has been slowing steadily for the last generation or so.
Some demographers argue that a lot of the benefits of climate, for
example, have run their course. Hicks said the exogenous factors will
matter far less.
The endogenous amenities are those driven by
the spending patterns of humans. Migration is now more local. The
communities that have done best have responded to what households are
looking for. People tend to value schools enormously, recreational
amenities and safety. They're willing to forego other things to live
where they get better education. That manifests itself in household
location decisions. "The amenity aspect is really driving location
decisions," Hicks said.
Manufacturing is less likely to locate in an
An interviewer asked Hicks how cities in the
urban core make themselves competitive for manufacturing. He
responded, "One place where manufacturing is less likely to locate is
an urban city, unless you can drive down the land costs. It's unlikely
that many of the old factories will be resurrected into manufacturing.
I'm not sure manufacturing is the solution to urban problems. Many
workers stuck in the cities and unable to get out probably don't have
the human capital that manufacturers are looking for. Manufacturing is
not an urban renaissance tool."
Many factors in the manufacturing scorecard
are just as relevant to other businesses.
asked if any of conclusions of the manufacturing scorecard study have
validity to the service sector. "Absolutely," Hicks replied. "We live
in an economy dominated by local consumption of goods. Most factors
that manufacturing cares about also apply to the service industry.
When other businesses are making location decisions, many of the
factors in the manufacturing scorecard are just as relevant to them."
Tax incentives have little effect on
An interviewer asked how much of the
investment that cities put into convincing businesses to relocate in
their city makes sense. Hicks responded that before the 1970s, very
little of this went on. The efforts to scout businesses from other
locations came from the South. "This has morphed into huge efforts at
tax incentives and state governments trying to chase down businesses.
Research says there is little effect of these tax incentives."
Instead, the research suggests four things:
(1) Many state incentives are really
just part of the tax system and everybody gets them. These
non-discretionary credits seem to work better than those offered
through a political process to firms.
(2) Firms who receive discretionary
credits appear to offer a more optimistic assessment of job creation
than those who lose out on the bidding for these credits. This means
the credits are likely going to the wrong businesses.
(3) There is little evidence that
these credits play a large role in economic growth. Most studies find
some effect, but the cost per job is often astonishing. (He coauthored
a study which found only construction job impacts in Michigan's
largest program, at a cost of over $120,000 per job.) Studies that
find costs are more reasonable (a few thousand dollars per job) do not
report significant economic effects otherwise. Tax incentives just do
not have a robust track record.
(4) Discretionary tax credits are
really a symptom of a poor tax climate and credits simply shift the
cost of government to existing, and presumably successful, businesses.
"As long as voters are going to reward the
talk of commercial development by our leaders, they're going to think
that incentives matter," Hicks continued. "I believe there'll be a
backlash on some of that. I think we tell our elected officials that
we want jobs, but what we really want is for our community to be
better. The most successful places in the country don't engage in
Economies with large amounts of research and
development (R & D) tend to be near universities.
to a question about how the study reflects the R & D sector of the
economy, Hicks noted that businesses that pay for R & D do so
exclusively in pursuit of a profit. "They pursue R & D not to better
the economy, but to better their bottom line," he said. An R & D
economy is good, because those workers are paid better, have higher
human capital and are healthier. R & D is the source of economic
growth, Hicks continued. It's a cost, but it's a cost balanced by
demand. He observed that places that have big parts of their economies
in R & D tend to be near universities that drive R & D.
Hicks complimented the Civic Caucus for grappling with
what the policy decisions will be over the coming years. What do we do
to make our lives and our economies better? How intertwined are those
things? What is it that would cause more people to wish to live here
or satisfy people already paying taxes here? How do you balance that
against higher tax rates to do those things? How do business and
commerce play into that?
He's hopeful that the Great Recession will
cause us to focus on questions like these: How effective are tax
incentives? How important are the schools? How should we treat debt?
How do we derive efficiency?
"The scorecard is an opportunity to look at
footloose businesses like manufacturing, that can go most anywhere in
the country," he concluded, " and try to see what's driving them."
The Civic Caucus
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tax-exempt educational organization. The Core participants
include persons of varying political persuasions, reflecting years of leadership in politics and
business. Click here
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David Broden, Janis Clay, Bill Frenzel, Paul Gilje,
Jan Hively, Dan Loritz (Chair), Marina Lyon, Joe Mansky,
Tim McDonald, John Mooty, Jim Olson, Wayne Popham and