There are worse ways for Oklahoma to spend $700 million, but there are also better
Governor Stitt's Panasonic deal is a potentially promising incentive program but fails to address Oklahoma's chief economic challenges
Oklahoma’s policy/political spheres have been abuzz lately with Governor Stitt’s last-minute request for the state’s legislature to create a multi-million dollar incentive package for businesses seeking to invest billions of dollars within Oklahoma. While the governor is officially unable to say which particular company’s investment he is trying to attract, Nondoc has reported the prize to be a Panasonic battery production plant located in Pryor, Oklahoma. Following the governor’s lead, Oklahoma’s legislature has put forward House Bill 4455, offering a rebate on (extremely) large investments by businesses.
While the Legislature’s implementation of the governor’s proposal deserves credit for being a relatively well-designed tax incentive, it still fails to address Oklahoma’s most pressing economic need, workforce development. Instead of pursuing flashy giveaways to businesses, our policymakers should pursue sustainable solutions that make our state an attractive location to all businesses, not just the chosen few we shower with preferential treatment.
What HB 4455 does
HB 4455, estimated to cost almost $700 million over 10 years, provides a 3.4 percent rebate for capital investments (such as building a new production facility) worth more than $3.6 billion. These investments must result in the creation of at least 4,000 new jobs over five years, and these new jobs must meet the standards of the Quality Jobs Program, which mandates minimum pay thresholds and health insurance benefits. By tying the new jobs requirement to these minimum standards, the Legislature is trying to ensure that Oklahoma’s government isn’t shelling out hundreds of millions of dollars for a few thousand jobs that don’t even pay a living wage.
Proponents of HB 4455 claim that, in addition to the directly created 4,000 new jobs, the incentive package will have ripple effects throughout the local economy. The reasoning behind the claim goes approximately like this:
Panasonic will directly create the 4,000 jobs by hiring workers.
Panasonic’s newly hired workers will then go on to spend their incomes on goods and services in their local economy—increasing revenue to the businesses around the Panasonic plant.
To accommodate the increased demand from the Panasonic workers, local business owners will ramp up production of their goods/services by hiring more workers.
These businesses’ newly hired workers will also spend money in the local economy, continuing the cycle of increased spending and employment.
While this makes sense in theory, there are reasons to doubt that HB 4455’s economic impacts will turn out to be quite as rosy as lawmakers are suggesting.
Firm-specific business incentives make our economy less fair
For a variety of reasons, taxpayers should be skeptical about multi-million dollar incentive packages aimed at luring big businesses into the state. The first reason being that these deals are entirely antithetical to the free market, which is something that our governor ostensibly cares about.
When politicians single out certain businesses for sweetheart deals, they are by definition creating an unfair playing field. In practice, these deals tend to give large businesses a significant advantage over small businesses. Nearly one-third of firms opening locations with 1,000 or more employees receive some sort of firm-specific incentive, compared to less than 0.2% of companies with 250 or fewer employees. Large firms are more attractive for policymakers to woo because they bring in more jobs, but their preferential treatment can come at the expense of local small business competitors.
Many business incentives fail to bring about the promised benefits
And what about these jobs that incentives are supposed to bring? Well, there’s disheartening news on that front. A Princeton analysis of tax incentives “do[es] not find strong evidence that firm-specific tax incentives increase broader economic growth at the state and local level.” This means that, while Governor Stitt’s Panasonic deal may bring the promised 4,000 jobs, there are no guarantees that this will result in any employment boost to the surrounding area.
Another reason for skepticism is that, of the 4,000 jobs, many of them might not be “new,” or even go to Oklahomans. According to a Brookings report, “On average, only 10-30% of new jobs [from business incentive programs] go to state residents who are not already employed.” Combining the estimate of 30 percent of new jobs going to state residents with HB 4455’s $698,020,000 price tag, this means Oklahomans would be paying over $580,000 for each Oklahoman we’d get back to work.
Finally, there’s the question of whether or not Panasonic even needs this deal to locate in Oklahoma. The same Brookings report linked above notes that 75 percent of the time, government incentives have no impact on companies’ location decisions. It’s entirely possible that, if HB 4455 passes, Oklahoma’s taxpayers will have shelled out hundreds of millions of dollars for something that was going to happen regardless.
However, some business incentives are better than others
Despite the dismal literature mentioned above, not all incentive packages are doomed to an expensive failure. When the packages are beneficial to the surrounding economy, many of the factors that impact their success typically revolve around the details of their location. In short, incentive deals luring companies to a specific location work best when that location:
is economically distressed — When targeted to an area that businesses would not otherwise be attracted to, incentive packages can help to kickstart economic activity, leading to the revitalization of that area.
has slack in the local labor market — When a location has a high unemployment rate or low labor force participation rate, this means the targeted company can draw on unemployed people from the local economy to staff the new facility. Without this labor pool to draw from, companies will either poach workers from existing local businesses or bring in employees from out of state.
provides synergies with nearby businesses — When the targeted business can integrate well into the local economy by selling/purchasing products to/from local businesses (while also bringing money into the community through exports), it can have a multiplier effect with regard to jobs and income. This is especially true for areas with clusters of high-tech businesses.
Is HB 4455 good as far as incentive programs go?
Well, HB 4455 is nominally bound up by an NDA, which has troubling democratic implications. Citizens deserve the opportunity to know and comment upon how our tax dollars are being spent, and NDAs remove that opportunity. But economically speaking, HB 4455 appears to be surprisingly well-designed.
One positive aspect is that, while a $700 million price tag seems high, it is funded up front using excess dollars unspent in previous years. This means that HB 4455 at least won’t tie Oklahoma to a long-term financial obligation that will be a consistent drain on our state budget. This is particularly important given the structural deficit faced by Oklahoma’s government.
The incentive program in HB 4455 is also geographically well-targeted. The Panasonic plant would be located in Mayes county, which is considered at risk of being economically distressed. While the county has a low unemployment rate, it is higher than the state average. Mayes county also has a low labor force participation rate, indicating that there may be slack in the local labor market. Furthermore, Panasonic’s battery plant would synergize nicely with Canoo’s electric car manufacturing plant in the same area (also brought about by a generous incentive package), and the battery industry is growing rapidly, indicating that the Panasonic facility could likely be a generator of exports for Oklahoma.
While any incentive deal is inevitably going to be a gamble—will it produce the economic activity it promises, and does the targeted company actually require subsidies to operate within the state?—the program outlined in HB 4455 seems like it could be well-positioned for success.
Is HB 4455 the best use of our money?
While HB 4455 is a relatively well-structured incentive program, it fails to tackle what business leaders widely recognize to be Oklahoma’s key economic issue: workforce development. Businesses don’t just want to locate wherever they can get the sweetest tax deal. They also want to open up where the local infrastructure is well-maintained, their employees’ children can get a good education, and they can draw upon a highly skilled pool of workers. In Oklahoma’s case, defraying companies’ investment expenses is not the squeaky wheel that needs the grease. According to CNBC’s Top States for Business, Oklahoma already ranks first in the Cost of Doing Business category. Despite this, we rank 32nd in Workforce and 32nd overall.
Instead of making Oklahoma an even cheaper place for large companies to do business, we should focus on developing the skills and infrastructure our workforce needs to be healthy, financially secure, and competitive. Investments to improve the quality of our workforce include increasing access to affordable child care, undoing funding cuts to higher education, creating a state paid family and medical leave program, and targeting tax breaks to low-income workers rather than high-profit companies. By bolstering the health, education, and financial security of Oklahomans, our policymakers can create a state that businesses want to move to, even when we aren’t bribing them to do so.