April 1, 2021

Ending Nondisclosure Agreements Would Reduce Subsidy Waste

Testimony before the Illinois General Assembly, House Revenue and Finance Committee
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Chairperson Zalewski, Vice Chairperson Tarver, Spokesperson Reick, and members of the House Revenue and Finance Committee:

My name is Michael Farren, and my research at the Mercatus Center at George Mason University focuses on evaluating government efforts to foster economic development. I am grateful for the invitation to discuss the problems associated with economic development subsidies and the partial solution offered by HB 22.

States and cities spend an estimated $95 billion annually on economic development subsidies. Most academic research finds that these subsidies fail to improve economic outcomes, and they may even reduce economic growth, especially at the local level. States and cities find themselves trapped in a prisoner’s dilemma—an unproductive competition caused by restrictions on cooperation—wasting ever-larger shares of their tax revenues on subsidies.

Corporations seeking subsidies usually demand confidentiality in negotiations with government officials. This arrangement enables corporations to play local governments against each other to extract the highest possible value of subsidies, at great cost to taxpayers. Furthermore, public services become underfunded when the demand for services increases while tax collections decrease.

HB 22’s ban on local officials’ ability to sign nondisclosure agreements (NDAs) associated with economic development subsidies offers a partial solution to the larger problem. Ending NDAs would likely reduce subsidy expenditures and improve local policymakers’ accountability to residents and taxpayers.

That said, I would like to highlight three ways how the proposed legislation could be made more effective at achieving its goal of reducing local government spending on subsidies:

  1. Close legal loopholes by expanding the legislation to apply to private individuals and organizations conducting subsidy negotiations on behalf of local governments.
  2. Combine HB 22 with other proposed legislation, such as HB 211, to restrict local governments from using subsidies to poach jobs from each other.
  3. Preempt local governments’ ability to use economic development subsidies altogether.

Loopholes in Nondisclosure Requirements

Many local government officials already face requirements that subsidy negotiations be subject to sunshine laws, open meetings regulations, or Freedom of Information Act (FOIA) requests. Signing NDAs is a primary way that officials get around these transparency mandates. Because HB 22 would limit local officials’ ability to engage in these backroom deals, it would likely reduce the public funds wasted on subsidies.

However, some local (and state) governments have already employed another tactic to ensure that their subsidy negotiations remain hidden from public knowledge: they use private individuals and organizations, such as a local chamber of commerce, as a third party to negotiate on their behalf. Because these agents are not public officials, their communications with subsidy-seeking corporations are not subject to sunshine laws, open meetings regulations, or FOIA requests.

In order to avoid this obvious loophole, Illinois legislators should consider how to expand HB 22’s application to any agent operating on behalf of local officials (with or without the local  officials’ explicit authorization). These private agents’ actions and speech should arguably be considered equivalent to the actions and speech of any public official, and their failure to abide by the same regulations could be subjected to the same legal repercussions.

Also, local officials consistently tie up FOIA requests with legal challenges, in spite of open-records requirements. To address this problem, policymakers may also consider expanding the legislation’s scope by limiting local officials’ ability to challenge FOIA-style requests regarding economic development subsidies.

Ending Intrastate Job Poaching

The purpose of HB 22—to reduce the wastefulness of locally provided subsidies—is complementary to the purpose of HB 211, which would prohibit local officials from using subsidies to poach companies (and their jobs) from other jurisdictions. Combining the two bills seems natural, since both appear intended to restrict the most egregious economic development subsidies.

Although the interstate subsidy competition receives most of the attention in the news media, local governments’ use of subsidies to encourage “jurisdiction jumping” might be an even larger problem. The most infamous case of this behavior was seen in the Kansas City area, where from 2011 through 2019, Kansas and Missouri together paid $335 million to motivate 116 companies to cross State Line Road, which bisects Kansas City. Though the states have since declared a shaky ceasefire, local governments continue to poach from each other, straining the truce. This beggar-thy-neighbor approach is widespread, occurring even between small municipalities, and causes even greater harm to overall economic growth than state-level subsidies.

Preempting Local Government Subsidies Altogether

Academic research finds that the higher taxes needed to fund economic development subsidies result in slower economic growth across the economy in question. That tradeoff is part of the reason why research doesn’t find broadly beneficial results associated with subsidies. But the effect is much more severe—5 to 10 times larger—for smaller municipalities. This finding suggests that if subsidies are going to be an element of economic development efforts, it might be better to manage them solely at the state level by preempting local officials’ ability to offer them. This approach would provide a more holistic solution to local subsidies than either HB 22 or HB 211.

Conclusion

Subsidy competitions for economic development often place policymakers between a rock and a hard place, and they may feel no other option than to sign an NDA to remain in the competition. For those policymakers, HB 22 would likely be a relief.

Still, HB 22’s effectiveness would be limited without expanding its application to anyone acting as an agent on behalf of local governments. Furthermore, reducing the expenditures wasted on subsidies could also be achieved by preempting local officials’ ability to poach jobs from other jurisdictions or even preempting local officials’ ability to provide subsidies altogether.

Regardless of the particular approach, the large body of academic research agrees that phasing out economic development subsidies would lead to greater economic growth.

Thank you for the opportunity to speak to you today. I look forward to your questions.

Attachments (3)

Matthew D. Mitchell et al., “Targeted Economic Development Subsidies Don’t Work: Negligible Community Benefits and Economic Development” (Research Summary).

Michael D. Farren and Matthew D. Mitchell, “Targeted Economic Development Subsidies Don’t Work. An Interstate Compact Could End Them” (Policy Spotlight).

Michael D. Farren and Matthew D. Mitchell, “Interstate Compacts against Economic Development Subsidies: How to Stop the Economic Race to the Bottom” (Research Summary).