Introduction

Every year, states and localities across the U.S. spend more than $90 billion on so-called “economic development” programs, which direct money to specific corporations in return for those corporations taking specific actions, such as opening a new facility in a particular place, moving an existing facility, or claiming to create a certain number of jobs.

All of that money, though, is buying very little. Research consistently shows that these economic development programs, which we will refer to as corporate subsidies, fail to achieve their stated purpose of increasing economic prosperity for local communities. Across myriad studies and ample real-world experience, in fact, the conclusion is very clear: Corporate subsidies have a negligible effect on any metric of economic well-being.[1] Instead, they siphon resources away from investments in things like infrastructure, health care, education, and child care, which can truly build local, sustainable economies.

Corporate subsidies also foster corruption, necessitating too-cozy relationships between public officials and private actors.[2] For example, a 2021 study found that more corporate subsidy spending in a state results in higher campaign contributions for incumbent politicians.[3] Another found that corporations that make state-level campaign contributions are nearly four times more likely to receive subsidies as those that don’t, and those subsidies are 63 percent larger.[4] Finally, a 2017 study found “that a greater number of lobbyists and campaign contributions from businesses leads to more subsidy spending, all else equal.”[5] And these subsidies favor large, politically connected corporations over the local businesses that help communities thrive.

There is a clear nexus between money in politics and public money flowing back to corporations in the form of state and local subsidies. In fact, one of the surest ways to determine if a state will increase its subsidy spending in a given year is not to look at any economic indicator, but merely to see if the incumbent governor is up for reelection.[6] Incumbents who want to stay in office will look to corporate subsidies to both garner campaign contributions and gain publicity from corporate projects.

Making matters worse, administration of these programs is often secretive, undermining local democracy and preventing local businesses from having a say over whether public resources should aid their dominant competitors, usually national or multinational giants.[7]

Voters, though, would prefer that state and local resources be aimed at smaller, local businesses and entrepreneurs, and they very much disapprove of the use of public dollars to entice out-of-state corporations to open new facilities in their state.[8]

Abolishing corporate subsidy programs in their entirety and redirecting their funding to better uses is the optimal policy choice. Short of abolition, this toolkit suggests other practical steps lawmakers at the state and local level can take to reform and rework corporate subsidy programs so that they are more transparent, better serve local communities, and don’t entrench dominant corporations in local economies. Where applicable, model legislation has been noted.

Notes

[1] See: Garofalo, Pat, The Billionaire Boondoggle: How Our Politicians Let Corporations and Bigwigs Steal Our Money and Jobs, Thomas Dunne Books, March 2019; LeRoy, Greg, The Great American Jobs Scam: Corporate Tax Dodging and the Myth of Job Creation, Berrett-Koehler Publishers, July 2005; Florida, Richard, “The Uselessness of Economic Development Incentives,” CityLab, Dec. 7, 2012, https://www.bloomberg.com/news/articles/2012-12-07/the-uselessness-of-economic-development-incentives; and Slattery, Cailin and Owen Zidar, “Evaluating State and Local Business Tax Incentives,” Journal of Economic Perspectives 34.2, Spring 2020, https://scholar.princeton.edu/zidar/publications/evaluating-state-and-local-business-tax-incentives, among many works.

[2] Felix, Alison and James R. Hines Jr., “Who Offers Tax-Based Business Development Incentives?,” The Federal Reserve Bank of Kansas City Economic Research Department, Nov. 2011, https://www.kansascityfed.org/publicat/reswkpap/pdf/rwp11-05.pdf.

[3] Sobel, Russell S., Gary A. Wagner, and Peter Calcagno, “The Political Economy of State Economic Development Incentives: A Case of Rent Extraction,” Dec. 23, 2021. Available at SSRN: https://ssrn.com/abstract=3992116 or http://dx.doi.org/10.2139/ssrn.3992116.

[4] Aobdia, Daniel, Allison Koester, and Reining Petacchi, “The politics of government resource allocation: Evidence from U.S. state government awarded economic incentives,” January 21, 2021. Available at SSRN: https://ssrn.com/abstract=3127038 or http://dx.doi.org/10.2139/ssrn.3127038.

[5] Jansa, Joshua M. and Virginia Gray, “Captured Development: Industry Influence and State Economic Development Subsidies in the Great Recession Era,” Economic Development Quarterly, 2017, 31 (1): 50-64.

[6] Slattery and Zidar, “Evaluating State and Local Business Tax Incentives.”

[7] Garofalo, Pat, “None of Our Business: How Corporations Corrupt Local Economies and Democracies,” American Economic Liberties Project, June 2021, http://www.economicliberties.us/wp-content/uploads/2021/06/Working-Paper-Series-on-Corporate-Power_9_6.28.pdf.

[8] Davis, Pete, Nourel-Hoda Eidy, and Grace Adcox, “The High Road on Wealth and Job Creation: Americans Want Less Smokestack Chasing, More Local Entrepreneurial Ecosystem Support,” Data for Progress, June 29, 2022, https://www.dataforprogress.org/blog/2022/6/29/the-high-road-on-wealth-and-job-creation-americans-want-less-smokestack-chasing-more-local-entrepreneurial-ecosystem-support.