The Business of Incentives

Business incentives handed out by communities and states are interesting things. Government officials are quick to point out how such incentives benefit the area as a whole. Company officials are quick to highlight the benefit of working in a particular community and how much they appreciate said community (i.e., government) support. The language becomes very interesting in these cases.

For instance, last week I saw a story in The Salt Lake Tribune that discussed how Utah is offering Goldman Sachs up to $20 million to hire more employees in Salt Lake City. The goal? To add 375 more jobs with an average salary of $75,000. Goldman would receive payment of the $20 million in the form of a tax rebate over 20 years.

In an email from Goldman Sachs, the managing director wouldn’t comment on the specific situation, but he did say that:

Goldman Sachs has had an excellent experience in the state of Utah over the past seven years. We strive to be an employer of choice and look forward to growing our business here in the future.

The state explained why it offered the incentive this way:

…the large incentive is merited because of the company’s high wages. The company’s average wages are significantly higher than the Salt Lake County median wage of $32,828. In addition, the company is making a capital investment in the city of more than $20 million.

First, look at Goldman Sachs’ statement: it’s “had an excellent experience in the state of Utah.” Based on this “excellent experience,” couldn’t Goldman make certain projections about the value of increasing its presence in Utah, minus the incentives? Second, look at the state’s explanation. Its rationale is even more curious.

Notice the use of the word “average.” From that usage, one can speculate that some salaries will be more and some salaries will be less, potentially affecting the tax rate. Even more intriguing is the state’s expectation that Goldman will make “capital investments…of more than $20 million.” Ultimately, there’s no promises or guarantees associated with either party.

For example, what happens if the state pays out a tax rebate over three years, totaling $3 million, and then Goldman Sachs downsizes its Salt Lake offices? Do the potential taxes from those salaries over three years make up the $3 million paid to Goldman? I’m sure minds smarter than mine have already done the math, but incentives rarely benefit both parties because no guarantees exist. I’m inclined to believe that businesses usually come out ahead on a regular basis, otherwise they wouldn’t continue to take the incentives.

Incentives don’t make sense, at least not the way they are currently explained. If all involved parties admitted that a certain taint of bribery comes with the concept of incentives, I might find the whole thing more believable. Instead, everyone tries to make it sound as if they are really doing a favor for the other. In this case, the state is doing Goldman Sachs a favor, helping to cushion the overhead of hiring 375 more people. Goldman Sachs is doing the state a favor by hiring 375 more people, increasing the tax base.

Ultimately, Goldman Sachs, and any other business for that matter, should make decisions based on the validity of the value to the business, not on artificial money provided by government incentives. And governments shouldn’t kid themselves that these deals are always in the best interest of the community.



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November 2007
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