The Tennessean recently published an article examining the industrial machinery tax credit based on a study jointly commissioned by the Tennessee Department of Economic and Community Development (TNECD) and Department of Revenue (DOR). The article concluded in its headline that Tennessee’s “largest tax credit for [businesses] costs $1.2 million per job, study finds.” This headline, unfortunately, misinterprets the credit and the study.
The authors of the report, Anderson Economic Group, have said that such a cost per job calculation for the industrial machinery credit is neither an appropriate nor meaningful way to interpret their findings.
“The industrial machinery credit is there to encourage investment in Tennessee, and it accomplishes that,” Jason Horwitz, senior consultant at AEG and co-author of the report, said. “Every year, the industrial machinery credit results in nearly $100 million in investment in the state that wouldn’t happen otherwise.”
AEG’s study is part of a proactive evaluation of the State’s overall business incentives. It is responsible to evaluate these policies on a regular basis, which is why TNECD and DOR previously introduced legislation that requires a periodic review of business tax credits.
This first review by AEG analyzes all of the business tax credits the State offers. The Tennessean article mostly focuses on the two largest — the industrial machinery tax credit and the jobs tax credit.
The report finds that Tennessee’s mix of business tax credits encourages investment, increases competitiveness for manufacturers and drives wage growth as well as hiring in our state. These business credits encourage hiring and investment that otherwise would not have occurred – decisions that AEG finds leads to more economic activity in Tennessee.
The industrial machinery tax credit is designed to encourage manufacturers to make investments in advanced industry equipment and boost productivity.
In 2014, nearly 1,800 companies claimed a total of $64.1 million in industrial machinery tax credits. These companies represent a substantial segment of Tennessee’s economy, accounting for $68 billion in sales, $17 billion in employee compensation, and nearly 111,000 jobs.
Bradley Jackson, the president of the Tennessee Manufacturers Association, calls the industrial machinery tax credit “essential to Tennessee’s continued economic growth and development.”
AEG’s analysis found companies receiving the industrial machinery credit annually invested about $4.4 billion in Tennessee. AEG attributed $86 million of this investment in new equipment exclusively to the industrial machinery tax credit in 2014. Wages at companies claiming the credit were five percent higher than those of peers who did not claim it, suggesting the credit is also increasing productivity as intended.
At no point in the report does AEG conclude that the industrial machinery credit costs $1.2 million per job. The Tennessean prominently made this assertion even after repeated attempts by TNECD and AEG to make the reporter aware of this miscalculation.
Tennessee does, however, offer a tax credit that is aimed directly at hiring – the jobs tax credit. The jobs tax credit provides a credit equal to $4,500 per job, which can increase based on several factors. Companies claiming the jobs tax credit created more than 41,000 new jobs from 2011 to 2014, and grew jobs at a faster rate than other companies that did not receive the credit.
AEG cautions “it is not always appropriate to consider a tax credit’s goals or effectiveness in isolation, but as one tool in a toolkit alongside several other incentives that are often used in combination.” Tax credits are used as part of a larger package, along with TNECD’s FastTrack grants and other incentives for relocation and expansion.
To compete in a global economy, businesses must have a high quality workforce and state-of-the-art facilities to meet the demanding needs of consumers while increasing efficiencies and profitability. Creating a business-friendly climate that attracts investments in advanced industries is critical to establishing growth in Tennessee’s economy. Without a collection of competitive business incentives, companies may target and select other states for these significant investments.
Tennessee’s stories of success have received national recognition that is directly tied to our economic development efforts. Tennessee leads the U.S. in advanced industry job growth, according to the Brookings Institution. The growth of these higher skilled jobs in advanced industries helped push Tennessee’s median household income up 6.4 percent in 2015, the second fastest rate of growth nationwide. IBM named Tennessee first in the country last year for new jobs from foreign direct investment.
More Tennesseans are working now than ever before and Tennessee’s GDP is the highest in history. Last year, TNECD secured more than 21,000 job commitments and $5.3 billion of investment from companies, which are projected to generate $87.3 billion in economic output and create another 33,300 indirect and induced jobs over the next decade. TNECD achieved this in a fiscally responsible way: The average FastTrack grant reached a low of roughly $3,000 per job commitment last year.
These results bear more scrutiny and appreciable value than what a simple, miscalculated math equation attempts to capture in the article’s misdirected headline.
AEG’s report offers recommendation that our departments will review with stakeholders this summer to ensure business tax credits remain viable, competitive and also produce optimal returns to Tennessee’s economy. But it is important to note, the primary business credits are working as intended. They encourage hiring and investment, drive wage growth, and make our businesses more productive in an ever increasing, competitive global market. Our state’s broader job growth and economic development success speak to that.