Fiscal Analyst Suggests Ending $780M Tax Incentive

An almost $800 million tax incentive program meant to lure companies to California could hurt small businesses and should be canceled, according to the non-partisan Legislative Analyst’s Office.

Lawmakers created the Competes program in 2013 partly to replace the state’s previous economic development strategy, after the Legislative Analyst’s Office found that one wasn’t working.

Under Competes, the state can offer tax credits to businesses if they agree to move into or expand in the state.

“It seems like in a lot of these cases, they were going to create those jobs anyway—that’s their long-term plan,” says report author Brian Weatherford. “They’re a California company, all of their customers are in California, so they’re probably going to do that here, anyway.”

About a third of the agreements went to businesses competing locally against other California companies. In those cases, one business’s gain through tax incentives can hurt its competitors.

“There’s only so much demand for what it is that they’re selling in that town,” Weatherford says. “And so, it might have a negative effect on the other businesses—and it might not be dramatic for any one of them—but, at the same time, the overall state economy is not growing. And the point of the program is to grow the state economy.”

The report says it’s impossible to determine whether the program resulted in a net economic benefit or how much.

States commonly face this problem--determining who requires the incentives to move, remain or expand in the state—when offering targeted tax credits. Economic analyses from across the political spectrum question the utility of economic incentive programs.

The report suggests a broad tax cut that affects all businesses could be a better option.