Infrastructure, education investments, not tax incentives, best way to grow

PROVIDENCE – New England states should focus economic development efforts on rebuilding infrastructure and improving education systems, not on tax credits and other government subsidies for business, a University of Massachusetts economist says in a report released Wednesday.

That conclusion comes just weeks after the R.I. Economic Development Corporation approved a controversial $75 million loan guarantee to a video game development firm owned by former Red Sox pitcher Curt Schilling to woo the company – and potentially hundreds of jobs – to Rhode Island.

Jeffrey Thompson, an economist at the Political Economy Research Institute at UMass Amherst, said his research indicates that governments should stick with improving certain public services to boost economic development.

“Spending and investing in areas at the core of public sector mission – providing education and maintaining infrastructure – are effective at creating jobs in the short term and building prosperous economies over the long term,” Thompson said in the study, Prioritizing Approaches to Economic Development in New England: Skills, Infrastructure and Tax Incentives. “The tax-cuts-and-business-subsidies approach to economic development, on the other hand, will do little to create jobs in the short run, and is not the most effective approach to generating growth over the long term.”

Thompson noted that most infrastructure repairs attract matching funds from the federal government and lead to local hiring while spurring private investment. The report concluded that Rhode Island will create 12 jobs for every $1 million invested in public buildings, roads and computer equipment, among other things (7.1 direct jobs, 1.5 indirect jobs and 3.4 induced jobs).

And in Rhode Island, the transportation system desperately needs the maintenance, Thompson said, pointing to another study indicating that 53 percent of the state’s bridges are structurally deficient or functionally obsolete.

And, he contended, spending on education can create jobs, too. Each $1 million spent by Rhode Island leads to between 26 and 33 jobs for teachers, aids, custodians, nursing, professors, bus drivers and others, according to Thompson’s research.

He asserted that research shows improved school systems help attract business, increase employment rates and raise personal income.

In contrast, Thompson said studies have indicated that subsidies and tax incentives – such as the six tax-credit categories that he said cost Rhode Island $33 million in fiscal 2009 – just don’t work.

“As much as 96 percent of the jobs and most of the investments used to claim tax credits would have been created even without the incentives,” he said in the report. “Some studies do find an impact on economic growth. One widely quoted finding from a literature review suggests that a 10 percent reduction in business taxes will increase an area’s economic activity by around 2 percent. Much of that activity, however, is simply employment and investment that would have otherwise occurred in a neighboring city or state.

“The best research suggests that virtually all research and development activity used to claim tax credits is simply redirected from neighboring states,” he continued. “In the cases in which jobs are actually created, research suggests that one-third to one-half go to people from outside the state or region.”

In addition, he said, the incentives and subsidies deplete revenue that could be spent elsewhere.

“In the short term, as well as over the long run, the best policymakers can do to create jobs and generate economic growth is to make the state’s economy more productive by investing in infrastructure and education,” Thompson said.