In 2013 and 2014, then-gubernatorial candidate Greg Abbott expressedskepticism about corporate welfare. His predecessor, Governor Rick Perry, had no such qualms. Perry had established the Texas Enterprise Fund (TEF) in 2003 to help attract out-of-state businesses by dispensing “economic development” incentives. It grew to become the largest closing fund of its kind in the country.
But candidate Abbott wasn’t impressed. He repeatedly worried about corporate welfare cronyism, saying, “government should get out of the business of picking winners and losers.” However, when asked whether this meant he would discontinue the TEF—a program that does just that—the candidate did not directly answer.
Now it appears we know the answer. In his recent State of the State address, now-Governor Abbott called on the legislature to expand the TEF, urging them to allocate $108 million to be used by early 2019.
Though programs like the TEF make little economic sense, they make perfect political sense. They allow politicians to bestow benefits on a small but organized (and thus powerful) set of interest groups, while spreading the costs across a broad but unorganized set of taxpayers, consumers, and business owners.
The TEF has long been dogged by accusations of misuse. A September 2014 audit discovered a lack of accountability between 2003 and 2013, as officials awarded $172 million outside of formal channels and failed to verify whether recipients actually created the jobs they promised.
Even if the TEF had a clean record, the policy itself is counterproductive.
Texans have spent an astounding $609 million on business subsidies since the inception of the program. The same amount of money could have fully funded the K-12 education of 5,000 students or repaved 500 miles of highway from Lubbock to Corpus Christi.
What might have happened if $609 million had not been collected from taxpayers at all? Imagine how many valuable local jobs the individuals and businesses who footed the bill could have created over the past 14 years had they faced a lower tax rate. And because all taxation involves what economists call “excess burden,” those who paid the tax bills actually lost more money than TEF’s beneficiaries gained.
Abbott argues that “having a deal-closing fund can be an effective tool in keeping Texas competitive.” In reality, the fund is quintessentially anticompetitive, tilting the playing field toward those who know how to work the political system and away from those who don’t.
If yours is a homegrown Texas business, your tax dollars go to your potential competitors.
To make matters worse, corporate subsidies encourage Texans to specialize in the wrong industries. If a business would not locate in Texas but for the subsidies, that suggests that Texas is not well-suited for it, and that Texans could be more prosperous focusing on another pursuit.
Moreover, those firms that are enticed to relocate for government cash are just the sort that are likely to skip town when a better deal comes along.
The numbers don’t lie: A review of dozens of empirical studies shows that these types of programs simply do not produce the sort of widespread prosperity that their proponents claim. As one recent report put it, business incentives “are excessively costly and may not have the promised effects.”
When asked about the TEF and how to ensure long-term prosperity for Texans, then-candidate Abbott had a wise answer: “Good tax structure,” he said, is the best incentive for business in Texas. Indeed, a good tax and regulatory environment, and a general respect for citizens’ economic freedom, are much better bets than corporate welfare. Hundreds of studies have now documented the direct association between greater economic freedom and higher standards of living.
There would be no better way to get the government “out of the business of picking winners and losers” than to close down the Texas Enterprise Fund and instead expand Texans’ economic freedom.