Jul 23, 2019

Quotable Quotes: Targeted Economic Development Subsidies Don't Create Economic Growth

Michael D. Farren Research Fellow , Philip St. Jean

“You have to spend money to make money” is a common justification for economic development subsidies. Politicians and paid consultants argue that targeted economic development subsidies (TEDS) are a necessary investment in economic growth, but the academic research shows they rarely lead to widespread economic or community improvements.

Furthermore, TEDS have little to no influence on where a business chooses to locate or expand. Most economic development subsidies just don’t work.

Misspending of public resources on TEDS means that we miss out on real opportunities to assist economic growth, like by investing in public goods and critical public services or decreasing tax rates for all taxpayers. A business-friendly political environment and investment in local amenities, such as public transportation, education, and public spaces seem to be much more important than subsidies.

As an example, Amazon’s HQ2 request for proposals clearly indicated that the company was looking for a high-amenity urban area. Recent comments by Brian Huseman, Amazon’s vice president for public policy, clearly show Amazon was concerned with skilled labor availability first and foremost when choosing a location for HQ2, and that subsidies were an afterthought:

“Besides, Huseman said, contrary to speculation, it was never really about the money.

‘It’s not just monetary incentives, but it’s looking at the comprehensive environment to allow companies to flourish,’ he said.”

and,

“It turns out that tech talent was the biggest driving factor for us. Both tech talent on day one, but also tech talent in the future.”

“Many locations had current tech talent,” Huseman said. “What was unique about Virginia was its commitment to developing that long-term talent pipeline and closing the skills gap.”

Taxpayers are often saddled with paying off subsidies for years and even decades—especially those which pay for physical facilities or targeted infrastructure—and these costs sometimes linger long after a business has moved on or closed down.

This tax income that is forgone, although not as readily observable, can have substantial community impacts. A recent report by Good Jobs First found that local schools across 28 states missed out on $1.8 billion in property tax-based education funding as a result of economic development subsidies.

TEDS don’t work and are not worth the investment. Yet subsidies remain a politically popular staple of government economic development programs. Lack of oversight, transparency, and official accountability keeps the public misinformed of the full cost and negligible outcomes of subsidies, contributing to their continued popularity. And politicians, subsidized corporations, and the economic development consultant industry—the only consistent beneficiaries of TEDS—are motivated to maintain the charade.

But the tide seems to be turning as more community leaders come to understand the considerable tradeoffs and even outright harm TEDS cause. Below are some quotes by policymakers, business leaders, and researchers highlighting the costly failure of TEDS.

 

Timothy J. Bartik, “Helping Manufacturing-Intensive Communities:  What Works?,”  Center on Budget Policy and Priorities, May 9, 2018:

“I find no evidence that job growth in these areas is significantly spurred by cutting business taxes or increasing business tax incentives. The estimates are precise enough to rule out the possibility that such lower business costs could have large growth effects per dollar of cost reduction.”

 

Alan Peters and Peter Fisher, “The Failures of Economic Development Incentives,” Journal of the American Planning Association, Vol. 70, No. 1, pp. 35, 2004:

“Given the weak effects of incentives on the location choices of businesses at the interstate level, state governments and their local governments in the aggregate probably lose far more revenue, by cutting taxes to firms that would have located in that state anyway than they gain from the few firms induced to change location.”

 

Richard Florida, “The Uselessness of Economic Development Incentives,” CityLab, December 7, 2012:

“Using detailed statistical models to control for a wide variety of factors, the study found that companies that received incentives expanded more slowly than others, and worse yet that overall effect of incentives was a reduction of 10.5 jobs per establishment. Incentives had their biggest effect by far not on actual jobs, but on "announced growth," finding that the average business receiving incentives overestimated its future employment by 28.5 jobs.

 

Todd Gabe and David Kraybill, “The Effect of State Economic Development Incentives on Employment Growth of Establishments,” Journal of Regional Science, Vol. 42, No. 4, pp. 723, 2002:

“Our analysis suggests that incentives do not substantially increase, and may even decrease slightly, the amount of employment change in the two years after an establishment launched an expansion.”

 

Andrew Schwartz. “Realities of Economic Development Subsidies,” Center for American Progress, November 1, 2018:

“[F]ar too often, economic development incentives are irrelevant to decision-making, fail to meet promised results, take away from existing or potential public services, lead to zero-sum competition among governments, and lack appropriate oversight.”

 

Mark Funkhouser, former mayor of Kansas City, “Should we ban states and cities from offering big tax breaks for jobs?The Washington Post, September 15, 2014:

"Even if a jurisdiction says, 'Well we have to do it because the other folks are doing it,' no, actually, you don’t. Go ahead and let them take the poison. It doesn’t increase job growth… We invested in the Interstate Highway System. We spent money on stuff that actually does create jobs: investment in infrastructure and investment in education. You need to have tools, excellent port facilities, excellent highways, and you need a highly skilled workforce. We have taken that money and shifted it away from the real generators of economic wealth and we’ve given it to people to line their pockets. If a state said, 'No, instead of $3 billion for Boeing, we’re going to invest it in schools, and we’re going to invest it in highways,' they would win."

 

(This will be an ongoing project to collect such quotes. If you have suggestions we’d appreciate submissions to mfarren@mercatus.gmu.edu).

Photo credit: Victória Kubiaki/Unsplash.

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