Kansas is going down wrong path in sweetening a subsidy when company has likely made its decision

Gov. Laura Kelly just signed legislation that would hand out over $1.3 billion to ostensibly attract a mystery company to Kansas. House legislators initially called SB 347 a “train wreck” and practically raked its author over coals in its first hearing, but the House eventually joined the Senate in holding its nose to pass the bill.

Kansas’ contribution to a nationwide surge of megasubsidies is frustrating because research shows that in most cases, the company in question would have made the same decision without the subsidy. Furthermore, policymakers in Topeka have set an especially worrisome precedent.

This deal is unusually generous. Ordinarily, megasubsidies are tied to state payroll taxes paid by employees of the subsidized company, matching payouts to increases in state tax revenue (though this doesn’t mean that the subsidy is costless). But under SB 347, Kansas will reimburse part of the mystery company’s total payroll expenses. That’s unheard of.

This brazen approach puts the state on the hook for what could be unexpectedly large payouts, especially if inflation continues to increase.

The Senate wisely limited that risk by amending the legislation to provide non-refundable tax credits, but the House’s re-revisions allow the secretary of commerce (Lt. Gov. David Toland) to provide 100% refundable credits. This is significant: While non-refundable credits can zero out a company’s tax liability, refundable credits mean that Kansas could owe the mystery company.

Toland argued that making the tax credits nonrefundable would be a “deal killer.” But in my professional judgment — based on extensive experience studying these kinds of subsidies — these goodies are simply icing on a cake that probably wasn’t needed in the first place.

Academic research shows that almost 90% of subsidies don’t affect a company’s final decision of where to locate or expand. Those decisions are instead made based on local workforces, access to suppliers and customers, and other region-specific advantages.

It may be difficult to believe that billions in subsides wouldn’t sway most corporate location decisions, but it helps to frame the size of the subsidy in relation to the company’s finances.

For example, if recent reports are true that a Panasonic battery plant is the legislation’s target, then the $1.3 billion in subsidies represent less than seven days of revenue for the international conglomerate. Corporate executives aren’t going to gamble decades of future profits on a second-best site for a relatively small payoff.

Would you buy a lower-quality home just to save a week’s worth of salary? In the same way, the long-term value of the right location outstrips the value of almost any subsidy.

And if you stop and think about it, the companies whose decisions are changed by subsidies should be viewed with suspicion. They’re “flighty firms” who might fly the coop at the next best opportunity. SB 347’s “clawback” clauses might help prevent that from happening, but they wouldn’t be necessary for a business that is the right fit for Kansas in the first place.

In all likelihood, this mystery company needs Kansas more than it needs the subsidies. Dramas like this tend to be contrived after a company has already made its decision and is trying to sweeten the deal. Hopefully, Lt. Gov. Toland will remember to leave some cake for actual taxpayers.

Michael Farren is a senior research fellow with the Mercatus Center at George Mason University. He submitted neutral testimony on SB 347.