Free Market

Recipient of GOED Funds Explains Why They’re Not Necessary

The Governor’s Office of Economic Development exists, in its own words, to “provide rich business resources for the creation, growth and recruitment of companies to Utah and to increase tourism and film production in the state.” In layman terms, they try to attract businesses to the state by luring them in with tax credits. In exchange for setting up shop in the state and meeting certain criteria (such as employing a projected number of people), their tax burden is reduced on a “post-performance” basis.

GOED’s board of directors met last week, in part to fulfill this mission. In less than an hour, and with no discussion prior to voting or any dissenting votes, the board unanimously approved over $4 million in tax incentives for two businesses, and over $1 million in similar incentives for five films looking to use Utah for part or all of their locations. (There was discussion on each motion, but, oddly, the questions being asked and things being said were deferred until after the votes were already taken.)

The first of the two companies being offered a tax credit was Frontier Communications—a telephone and broadband provider operating in 27 states, including Utah. They want to expand their operations and create a customer service center, and were deciding between Colorado and Provo, Utah. “We’d obviously like to see them here,” said Jerry Oldroyd, the board member presenting the motion. With a forecasted employment of 550 employees and $11 million in revenue for state coffers over the next ten years, the board unanimously agreed to reduce Frontier’s tax burden by 20% with a tax credit not to exceed $2.2 million. The revenue projections and tax credit for the second company, Exeter Finance, were similar in size and impact.

We have previously observed how these tax credits are central economic planning, using the tax system to incentivize certain businesses. This favoring of one company over another distorts the market and disadvantages competitors. It is not the proper role of government, even if the results are deemed economically beneficial. As we all know, the ends do not justify the means.

In a prepared statement announcing GOED’s approved tax credits, Governor Herbert stated that “demand for Utah’s productive workforce continues to grow.” This is true, and yet the Governor and his agents believe that such demand can and should be manually stimulated by financially luring companies in. After all, it’s often claimed, if Utah doesn’t offer these incentives then our state will not be able to compete with other states that are giving away money on the condition that companies bring their business to their states.

Two statements from the GOED board meeting refute this claim.

The first suggestion that financial incentives aren’t what they are claimed to be came from Christopher Conabee, managing director of GOED’s corporate recruitment division. Noting some of the benefits Utah has to offer, such as an educated workforce, Conabee stated that on this basis Utah “can compete with states like Texas that have billions of dollars to give away in up front money” (as opposed to post-performance tax credits that come in on an annual basis).

“When you look at Utah’s total package,” Conabee told the Salt Lake Tribune last year, “that’s why we continue to have great business growth.” It’s impossible to determine whether GOED’s funds are even necessary, as they are only one consideration of many that companies make when considering locating or expanding in Utah. Indeed, the benefits of setting up shop in Utah are fortunately many, and it’s these other factors that likely hold more sway for a company than a 20% reduced tax burden. If financial incentives were as important as their proponents claim, then states like Texas that up front cash, and larger incentives, would be more successful.

Electronic Arts, a multinational video game developer, moved into a new studio in Salt Lake City in 2010 without any GOED incentives. Jon Dean, executive producer for EA, noted that “Utah has a lot going for it” including a talented workforce, business friendly government, and connection to supporting universities. These factors were sufficient to attract a large company without any tax incentive.

This brings us to the second statement from last week’s board meeting that reinforces this point. The company representative from Frontier essentially echoed what Dean said last year. Expressing appreciation for GOED “giving us [a] generous offer,” which he also called “gracious,” he noted that it was Utah’s workforce and infrastructure that makes them want to expand here.

It makes business sense to reduce your tax liability and therefore take advantage of any available credits. But the decision on where to locate your headquarters is a complex one in which every possible variable is considered. Clearly, a tax credit is one factor, but it is only one of many. Some company executives might suggest that it’s not even a primary or significant factor. In the end, sure, it’s “free money” so why not take it? It’s icing on the cake—not an essential ingredient.

This, of course, drives a stake into the heart of GOED’s activities which are justified on the basis that offering these incentives to some companies and not others is necessary to drive economic growth and bring business into the state. It simply isn’t true. While it may be helpful to some degree, it’s certainly not necessary.