Exactly Why Economic Impact and ROI Studies are Overblown

Commentary

Exactly Why Economic Impact and ROI Studies are Overblown

Like other states, Florida’s government invests in all kinds of economic development projects, using economic impact studies to assess “return on investment,” or economic bang for the buck. But these economic impact studies are structurally and quantitatively riddled with problems, resulting in poor government decisions that waste taxpayer dollars.

 

First, impact studies assume business investments would not have been made anyways by the private sector without government financial assistance. Florida attempts to “lure” businesses looking to relocate or expand to Florida by offering them special financial packages which range from upfront payments to long-term tax credits—about $200 million coming out of taxpayers’ pockets annually. State economic development agencies contend that these tools “tip the scale” in favor of Florida in business location decision-making.

 

However, in 2013, the state’s own research organization—The Office of Program, Policy, and Government Accountability—asked incentive recipients whether they would have proceeded with their project without incentives. A majority—64% of recipients—responded they would have proceeded anyways just on a different scale, while 22% said they would have proceeded with absolutely no changes whatsoever. In other words, public investment in 22% of cases to “induce” private spending was a total loss for taxpayers, and at least a partial loss for taxpayers in another 42% of cases. Notably, this data comes from the state’s own surveys, yet is not factored into decision-making.

 

Likewise, Visit Florida, on which state and local governments collectively spent nearly $500 million between 2010 and 2013 on marketing funded through the “Tourist Development Tax,”  markets Florida’s attractive features to tourists and potential future residents, using similar impact studies which suffer from the same flaws. Visit Florida tracks government marketing spending alongside tourist growth and assumes that certain numbers of tourists would never have come to Florida but for Visit Florida’s spending. This relies upon unscientific surveys asking tourists to identify “influences” that brought them to Florida to assess the program’s impact, but provides no definitive proof or causal connection between the program and the estimated number of Florida tourists.

 

The Visit Florida study even takes partial credit for respondents who said that “any information from social media” influenced their decision to visit Florida. Really? This is not causation, and only tenuously correlation, yet government cites these surveys to assert that Visit Florida has “created” economic activity where it otherwise would not have occurred. Additionally, this tourist marketing spending required the taxation of local business, which deters economic activity by hiking prices, making Florida less attractive.

 

Second, impact studies do not consider the opportunity cost of government programs. For example, the money wasted in what is essentially bribing businesses with taxpayer money to relocate to Florida, and tourists to visit Florida, is not just a face value loss. Diverted to other pressing state concerns, such as education, public safety, hospitals or the environment, this money might actually spur the state economy. For example, hiring more teachers, law enforcement or medical staff, who are likely to spend the vast majority of their paychecks locally, or funding Everglades programs is arguably a better use of funds. Or, what is almost never taken into account, leaving those taxes in the hands of Florida taxpayers, who spend money locally year after year, is almost surely a better solution.

 

But this isn’t how the state sees it. When Florida commissions an impact study, it tallies up its investment and then calculates its return. Nowhere in any of these reports is there a comparison to the impact that some other form of government activity or inactivity would have caused. A true economic analysis would compare various models for impact of not taxing and spending at all against various spending options.

 

Third, these impact studies are mistakenly presented as hard economic data, but are actually “guesstimates,” since the state cannot track how dollars make their way through the economy and therefore does not know the true impact of its actions. These “the path of the dollar” guesstimates that provide “direct” and “indirect” effects on the economy are truly not data. It works like this.

 

A direct impact is when the state pays a company to move a job to Florida—the “created” job is a direct effect. The indirect effect is where that new hire decides to spend their wages. How would the state know if a construction worker decides to spend his wages on eating locally—something the incentive program would take credit for—or to buy workboots on Amazon—where the program should not get credit? It doesn’t, and it can’t. And it certainly can’t tell us whether these decisions are growing the economy. Government can only make projections based on studies of industry. Obviously, the more wage earnings are spent in Florida, the greater economic “impact” to the state via sales and property taxes, but such a metric is difficult to assess.

 

Relocating firms are counted in the same overly optimistic fashion. The state expects property tax from their rent, sales tax on business purchases, and so on, so economic developers focus on recruitment, using policy sticks and financial carrots to attract and retain firms and jobs to keep as much of that investment inside the state as possible in order to maximize ROI to the state’s coffers. Is this a good deal for Florida taxpayers?

 

Ultimately, wealth and economic growth are created when two parties voluntarily exchange money, time, goods, and services in a way that is mutually beneficial to both parties, not when government investments meet their 1 to 1 return goals. By “injecting” money into the economy, all the state is really doing is taking tax money from some people and giving it to other people who they perceive, but don’t really know, to have economic impact.

 

Arguably, this is just a massive distortion and redistribution of the money that provides no real wealth creation or net economic activity. Until government can assess what “organic” economic growth would have been without taxing and spending the money in the first place, taxpayers should beware. Perhaps lower taxes would have resulted in more local consumer spending than was “induced” by the state’s tax and spend scheme. Alas, we will never know, yet the state will adamantly defend its position as critical to the economy. Like anyone else, elected officials like to be successful, which means to show that their programs are working for taxpayers, are vital to Florida’s success, and should continue taxpayer funding. That internal bias keeps government interpreting flawed data in a flawed manner, and keeps the taxpayer funding rolling in.

 

Lastly, when you consider how miniscule of an absolute job creation contribution these programs make, it makes the taxpayer commitment even more appalling.  In 2012, two years after “jobs” Governor Rick Scott had control of the economic development programs and before funding was cut in the most recent legislature, the state claims to have created 13,074 jobs compared to Florida’s total of 1,628,329 created in that year – for the math whiz out there that’s 0.8% of total job creation.  With this data in mind its becomes more and more difficult to justify taxpayer contributions of near $200 million annually for programs with such diminutive impact.  Yet, the impact studies have staked the intellectual space that these taxpayer-funded programs are “vital” to the economy despite their many flaws.

 

Hundreds, if not thousands, if not hundreds of thousands of other factors affect change in the economy. Arguably Florida’s other pressing needs, or even taxpayers’ personal decisions on where to spend their own money, would have a larger impact on Florida’s growth than incentive programs.