Business

State economist says 70 percent of Florida’s incentive programs are losing money

Gov. Rick Scott, speaking at the grand opening for Boeing’s Commercial Crew and Cargo Processing Facility at Kennedy Space Center, asserts that business incentives are critical to spurring job creation and economic growth around the state.
Gov. Rick Scott, speaking at the grand opening for Boeing’s Commercial Crew and Cargo Processing Facility at Kennedy Space Center, asserts that business incentives are critical to spurring job creation and economic growth around the state. AP

The debate over whether Florida should change its economic development policies reached its first legislative committee of 2017 last week — with new data casting a shadow on the practice of awarding taxpayer-funded perks to private businesses.

Critics call it “corporate welfare,” while proponents like Republican Gov. Rick Scott assert that business incentives are critical to spurring job creation and economic growth. Scott is seeking $85 million for Enterprise Florida Inc., the state’s principal economic development organization.

The warring factions reside mostly within the Republican Party, which dominates the state Legislature. Democrats are sympathetic to the development programs but are outnumbered 2-to-1 in the state House, and by 10 members in the 40-seat Senate.

The Careers and Competition Subcommittee, chaired by Rep. Halsey Beshears, R-Monticello, held a panel discussion this week with economists and government officials to review the return on investment for the state’s various economic incentive programs.

Central to the hearing was a presentation by Amy Baker, the state’s chief economist and legislative coordinator for the nonpartisan Office of Economic and Demographic Research.

“We’re directed by law to look at return on investment, and to look at it from the state’s perspective,” she said. “Does it return equivalent tax dollars to what we’re spending?”

The answer was decidedly negative.

According to Baker, nearly 70 percent of Florida’s state-level incentive and investment programs lost money during the past three years.

THE NUMBERS DON’T ADD UP

For every tax dollar awarded to a private business, the state needed to recoup a dollar in tax revenue in order for the investment to breakeven. If the state recouped more than a dollar in tax revenue, then the state made money. If it brought in less than a 1-to-1 match, it lost money.

Baker reported that 18 of the state’s 26 economic incentive programs failed to bring in enough tax revenue to break even — three of those programs were a total loss and required additional funding.

For comparison, 2013 rates of return were included for six incentive categories. All of them declined during the past three years, including Enterprise Florida’s Quick Action Closing Fund, a cash fund used by Scott — also the chairman of Enterprise Florida — to close the negotiated business agreements.

The program had a return of 60 cents for every tax dollar awarded, according to state economists.

Last year, Scott requested $250 million for the Quick Action Closing Fund, but the appropriation was blocked by state Rep. Richard Corcoran, R-Land O’Lakes. Corcoran is now speaker of the Florida House of Representatives, and is on record saying he’d like to abolish Enterprise Florida. His two-year speakership began in November.

As I look at this, the best-case scenario is that we have eight programs that are a good idea and 18 that are not.

Rep. Randy Fine, R-Palm Bay

Rep. Joe Gruters, R-Sarasota, was the first lawmaker to question Baker’s methodology.

“One of the areas that gets a lot of scrutiny is the Closing Fund,” he said. “Can you tell me the methodology? … Is that (60 cents finding) when the money leaves the state or when it leaves Enterprise Florida’s escrow account?”

Monies committed to businesses are held in a state escrow account and released when certain performance metrics are met. But Baker explained that for purposes of return on investment, it doesn’t matter when the funding makes it into the hands of businesses.

“There was $105 million in total expenditures (for the Quick Action Closing Fund) over the past three years, but only $30 million made it into the economy. The rest of it was trapped in escrow,” Baker said.

Either way, “it left the state (government) and didn’t get back into the economy, and it didn’t get spent on something else,” she said.

Rep. Randy Fine, R-Palm Bay, said he was “troubled” by the scoring methodology. “As I look at this, the best-case scenario is that we have eight programs that are a good idea and 18 that are not.”

Baker testified that the methodology was indeed sound.

FAIR OR UNFAIR?

State economists crafted the ROI-model to address legislators’ concerns that economic development spending increases state revenue — that they bring back more money than they spend. Lawmakers, particularly fiscally conservative Republicans, are loathe to be seen wasting taxpayer money.

“The model objectively addresses that concern,” Baker said.

Kelly Smallridge, president and CEO of the development board for Palm Beach County; Cissy Proctor, executive director of the Department of Economic Opportunity; and Chris Hart, president and CEO of Enterprise Florida Inc; all spoke in favor of development incentives.

Incentives don’t make or break a deal, they tip them in our favor.

Kelly Smallridge, president and CEO of the development board for Palm Beach County

Smallridge, the longest serving economic development official in the state, implored committee members to see business incentives as investment tools for improving economic growth, not government “entitlements” run amok.

“Incentives don’t make or break a deal, they tip them in our favor,” she said.

Professor Shawn Kantor, an economist at Florida State University, opposed taxpayer-supported incentives.

They’re inherently unfair. Some of your constituents have been working really hard building their businesses and you’re dangling carrots for new businesses who’ll grab the golden ring at the last minute while your constituents are paying the bill.

Professor Shawn Kantor, an economist at Florida State University

“They’re inherently unfair,” Kantor said. “Some of your constituents have been working really hard building their businesses and you’re dangling carrots for new businesses who’ll grab the golden ring at the last minute while your constituents are paying the bill.”

Kantor said that surveys of corporate leaders show that state giveaways are low on the list of factors of why companies choose to relocate. “Businesses are more interested in economic fundamentals,” he said.

All of the panelists agreed that the Scott administration and the state Legislature actively support positive economic fundamentals, such as low regulatory and tax burdens and efficient business permitting.

WINNERS AND LOSERS

If the state were to engage in money-losing development activities, Baker recommended spending on state infrastructure, such as highways and roads, aviation and seaports. Infrastructure projects often fail the 1-to-1 ROI test, but are critical for facilitating economic growth and social well-being, she said.

Spending tax dollars on research and development through the state university system was another area of unanimous agreement, even if taxpayer investments initially lose money. Over time, education and R&D investments would improve the state’s workforce and spawn entrepreneurial ventures, panelists said.

California has Silicon Valley and a world renowned bio-tech industry because the state has invested in its universities for 50 years, Kantor said.

The board at Enterprise Florida, which of course includes our governor as chairman, to a person understands that the taxpayer is our shareholder.

Enterprise Florida head Chris Hart, a former legislator

“There’s no quick fix or magic bullet,” Kantor said. “Politicians, bureaucrats and professors do a really bad job of picking winners and losers.”

Baker concluded her remarks by reiterating that Florida’s economic growth stems from its population growth — two times the national average — and will benefit from businesses relocating to Florida in order to service that growth for years to come.

She cautioned against providing incentives for businesses that might move to Florida anyway, and added that the state has 8.5 million workers and an $800 billion annual state GDP. Using incentives “to attract a worker at a time would be very onerous,” she said.

Enterprise Florida head Chris Hart, himself a former legislator, closed by saying that “when two economists agree, one is cheating off the other.”

“The board at Enterprise Florida, which of course includes our governor as chairman, to a person understands that the taxpayer is our shareholder,” Hart said.

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