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WHAT OTHERS SAY: Corporate subsidies don't work

Friday, December 13, 2013 | 6:00 a.m. CST

Yet another study has been released showing that state tax incentives to corporations have several unfortunate downsides, chief among them being that they don’t work. That is, they don’t create any more economic growth than would have been expected without the tax breaks.

Nor, say the study’s authors, do they create any measurable number of net new jobs. An incentive to — oh, let’s pick a corporation at random — Boeing might create new jobs in the aerospace manufacturing sector. But the economic activity in that sector does not necessarily spark overall growth. Indeed, because public dollars have been given away, overall state and local economies suffer.

The study was not done in Missouri, where Gov. Jay Nixon, the legislature and St. Louis politicians have come together to offer Boeing some $4.2 billion in incentives to build a new aircraft manufacturing plant here. The state’s share could come to $2.4 billion. On Monday night, the St. Louis County Council unanimously jumped on the Boeing bandwagon with what could amount to $1.8 billion more.

(St. Louis County’s largesse was particularly curious, inasmuch as many of the putative new Boeing employees can be expected to do what many of Boeing’s current employees here have done — move to St. Charles County. But never mind).

On Tuesday, Mr. Nixon held a Boeing bill-signing ceremony at the McDonnell Planetarium where he and other politicians practically dislocated their shoulders patting themselves on the back.

The study in question was done in New York state at the behest of Gov. Andrew Cuomo’s Tax Reform and Fairness Commission. Although the study dealt with tax credit programs, its conclusions apply equally to other forms of corporate giveaways. But because the study’s findings did not support the commission’s preconceived notions, it immediately was deep-sixed.

The research was done by Marilyn M. Rubin of John Jay College and Donald J. Boyd, a senior fellow at the Rockefeller Institute of Government. David Cay Johnston, formerly a Pulitzer Prize-winning tax journalist for the New York Times, reported on the study last week.

“When combined with many previous reports, the Rubin and Boyd study shows that state and local giveaways to corporations simply redistribute wealth upward without increasing jobs. Their continued existence is a testament to the benefits of being politically connected,” Mr. Johnston wrote last week at TaxAnalysts.com.

Among the conclusions in the the Rubin-Boyd study:

  •  “Business tax incentives violate principles of good tax policy and tenets of good budgeting. Six widely accepted principles against which to judge tax policies are economic neutrality, equity, adequacy, simplicity, transparency, and competitiveness.”
  • “Lower taxes for some taxpayers require higher effective tax rates for the vast majority of taxpayers for a given level of revenue. This is the ‘innocent bystander’ effect of business tax incentives — those not benefiting pay higher taxes.”
  • “By lowering taxes for some taxpayers while keeping them higher for others, incentives may treat similarly situated taxpayers differently and can make it harder to raise adequate revenue with minimum public resistance.”

The Rubin-Boyd study now goes on the shelf of widely ignored studies demonstrating that economic incentives to corporations are a terrible idea. Others include:

  • A 2012 study by the Pew Center for the States that concluded, “Policy makers spend billions of dollars annually on tax incentives for economic development, but no state ensures that policy makers rely on good evidence about whether these investments deliver a strong return. Often, states that have conducted rigorous evaluations of some incentives virtually ignore others or assess them infrequently.”
  • A investigation one year ago by the New York Times that looked at 1,874 corporate giveaway programs by the 50 states and their local governments. The annual cost of these programs was at least $80.4 billion. A full accounting was not possible, the Times reported, “because the incentives are granted by thousands of government agencies and officials, and many do not know the value of all their awards. Nor do they know if the money was worth it because they rarely track how many jobs are created. Even where officials do track incentives, they acknowledge that it is impossible to know whether the jobs would have been created without the aid.”
  • A study reported last summer in the Journal of Regional Science by Richard Funderburg of the University of Iowa and four co-authors. They looked at manufacturing tax incentives in 20 states during the 1990s and found that they increased industrial growth by only 1.2 percent, a figure “not statistically different from zero.”
  • A study done for the Federal Reserve Bank of Minneapolis in 2010 found that the impact of local enterprise zone job subsidies was negligible. One of the authors, Laura Kalambokidis, concluded that “the role of the state really should be to provide those services and make those investments that make the state a place where people really want to live and work, and businesses can easily start up and thrive. And so you’re talking about workforce variables, education all the way from early childhood to lifetime education and workforce retraining. You’re talking about physical infrastructure and transportation and technology. You’re talking about higher education. You’re talking about natural resource management, cultural amenities and arts amenities. These are all things that the state invests in and that help a business start up and be able to attract employees and be a place that can thrive.”

Ms. Kalambokidis is now Minnesota’s state economist. We could not agree more with her conclusions. Rather than doing the hard work of making Missouri a better place to live for everyone, state and local politicians have resorted to a gimmick play.

In doing so, they have embraced what Kenneth Thomas of the University of Missouri-St. Louis told the Post-Dispatch’s David Nicklaus are “squishy” cost-benefit analyses. They have ignored reams of solid data that say subsidies benefit only the politicians who grant them, the corporations that get them and a relatively few lucky people who get jobs from them.

For the rest of the state, the subsidies not only don’t work, but they suck money and energy that could and should be devoted to making Missouri a better place for everyone.

 Copyright St. Louis Post-Dispatch. Reprinted with permission.


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Comments

Michael Williams December 13, 2013 | 10:25 a.m.

Quite possibly the biggest example of corporate welfare in the US occurred in the mid-to-late 1800s. Railroad companies received ca. 175 million acres of western land (alternating sections next to the proposed lines), essentially for free. The total area was larger than the state of Texas. The railroad companies then sold off their sections to finance construction of the railways.

This action was widely criticized (and still is) as corporate welfare of the worst sort....we deliberately gave away land to a private entity so they could build something.

That we ended up with a means of transportation extending form coast to coast, opened up the interior of this country for settlement, and ended up with a country, seems lost on those critical of the act. I suppose the socialists among us would have preferred the US gov't sell off the land and build the railways itself.

Of course, the gov't likely would have botched it.

We can, and should, argue about the wisdom of tax incentives targeted at a specific corporation. It still surprises me that Governor Nixon vetoed the tax relief bill not too long ago and now supports tax incentives to Boeing. What's the difference?

But, I also know that a whole bunch of VERY high paying, VERY high skilled jobs in a great industry is a good thing for this state.

The question is: Do we compete, or sit on the sidelines?

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