State and local government leaders across America anxiously await the results of Congress’ debate over the next round of federal coronavirus relief. A $1 trillion bailout to close budget gaps brought on by the pandemic is on the line. But it’s not the only solution. Bipartisan reformers in the states have already been making headway on ending wasteful (and sometimes crooked) economic development subsidies — and Congress could help accomplish that same goal.
Together, state and local governments spend an estimated $95 billion each year on economic development subsidies, usually to entice businesses to operate in their jurisdictions. That could cover the annual budget of 11 states — combined. Repurposing the funds wouldn’t be a silver bullet, but could prevent the most painful spending cuts that governments will otherwise have to make.
Doing so would kill two birds with one stone, because subsidies don’t really improve widespread economic development. To pay for handouts, governments keep taxes unnecessarily high and cut funding for public services. Last year, teachers in Columbus, Ohio, marched against property tax breaks estimated to reduce school district revenue by $55 million. Subsidies also reduce innovation by protecting privileged companies from competition. The overall effect is slower economic growth.
Yet the problem persists, largely thanks to the “ribbon-cutting effect.” Politicians reap political benefits from claiming they created jobs, even if it leads to long-run economic harm after people stop paying attention. Even principled policymakers who oppose subsidies can feel compelled to play along. They don’t want voters to think their community is “losing” an economic competition with other communities.
Illinois state Rep. Bob Morgan perfectly illustrated things recently when he said, “These kinds of tax breaks have historically been justified as a necessary evil. But in many ways … they hold us hostage because other states are offering them.”
Kansas Gov. Laura Kelly agrees. When she and Missouri Gov. Mike Parson signed a truce in the economic “border war” between their states last year, she said, “I think both of us would prefer that we wouldn’t have to (offer subsidies), but I don’t think either one of us is really ready to unilaterally disarm.”
One of Chicago Mayor Lori Lightfoot’s first priorities was to reform the awarding of Chicago’s “tax increment financing” — subsidies which redirected $840 million away from schools, parks and other local districts in 2018 alone. Illinois Gov. J. B. Pritzker is similarly considering reforms to the state’s $175 million-per-year EDGE tax credit program and has ordered a review of its effectiveness. In June, a damning legislative audit found that the program was so badly mismanaged that it could not produce records of how many tax credits were active in 2017, or how many were issued in 2018, among many other problems.
As leaders like these take notice, legislation already proposed in more than a dozen states would create an interstate compact which would eventually end all subsidies. The binding nature of compacts, which comes from their constitutional origin, is important because agreements like the Kansas-Missouri truce are only one executive order away from falling apart.
New Mercatus Center research lays out the most important element of a successful interstate compact. The definition of subsidies must be as broad and as inclusive as possible — otherwise political entrepreneurs will find loopholes and the wasteful subsidy war will restart.
Alternatively, our own recent research recognizes that Congress could simply ban state and local economic development subsidies because they interfere with interstate commerce. Regardless of the fix, many local leaders would welcome the opportunity to end an economic competition they never signed up for in the first place.
New York state Rep. Ron Kim was one of the first policymakers to call for reform, saying, “We can choose to end the needless competition that pits states against each other. Corporations should never take precedence over people.” We agree.
Now, more than ever, state and local governments need to find ways to solve their budget gaps and motivate real economic development. Getting rid of subsidies is the obvious first step.
Michael Farren is a research fellow with the Mercatus Center at George Mason University. John Mozena is the president of the Center for Economic Accountability. The BDN publishes opinions from partner news services to bring a wider variety of perspectives to readers.