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Want to Clean Up Money in Politics? Start With Corporate Welfare

Economic development subsidies are a horrible deal: they don't improve communities or economies, just politicians' reelection bids.
Crony capitalism

Right now, state and local politicians running for reelection across America are living up to H.L. Mencken’s old adage that “every election is a sort of advanced auction on stolen goods.” In a time-honored tradition, spurred on by the risk that voters may blame them for the economic consequences of their COVID-19 lockdowns, governors and mayors are busily purchasing voter goodwill with promises of jobs at taxpayer-funded projects such as Tesla’s “Cybertruck” factory in Texas and Sherwin-Williams’ new headquarters in Cleveland. The stage is set for a potentially disastrous explosion of new corporate welfare deals across the country that could hamstring state and local budgets and burden communities for decades to come.

Despite the evidence that these kinds of economic development subsidies rarely succeed at creating jobs or growing economies, they’re flourishing right now because they reliably deliver on their actual purpose: getting politicians re-elected. The inconvenient truth of these subsidies is that they don’t actually exist to create jobs; they exist to make voters think politicians are creating jobs.

We hear all the time about the evils of “money in politics,” but these subsidies dwarf any amount of campaign contributions or “dark money” donations. Consider that the Federal Election Commission reported a final price tag for the entire 2015-16 federal election cycle of roughly $10.4 billion spent by presidential candidates, congressional candidates, political parties, PACs, and independent groups. However, that record two-year figure barely amounts to 5 percent of the estimated $95 billion per year that state and local politicians hand out in “economic development” tax credits, subsidies, grants, and other incentives.

Even in an era of trillion-dollar “stimulus” packages, that’s real money. For instance, $95 billion per year could fund the 11 smallest state budgets combined. Budget debates are often said to be about “guns or butter,” but $95 billion could deliver both by paying for all federal food assistance programs and still having enough left over to buy the U.S. Navy two brand-new Ford-class nuclear aircraft carriers.

However you figure it, taking that much money out of state and local budgets and handing it to crony capitalists imposes a massive cost on taxpayers and crowds out spending on basic government services such as roads, schools, and public safety, especially in lower-income communities.

Quite simply, the more money our local politicians give away to a few connected businesses, the less we have to spend on the things that matter to everyone—unless the rest of us pay more to make up for it.

The worst part about it is that these subsidies don’t actually create jobs or grow economies. Thanks largely to improvements in transparency and data collection that the economic development industry fought against tooth and nail, the research-backed evidence is increasingly clear that economic development subsidies generally do not make things any better. On the whole, they don’t change corporate behaviorcreate jobsgrow economiesadvance innovation or entrepreneurship, or help communities recover from recessions. They do, however, harm states’ long-term fiscal healthincrease taxes, and reduce economic freedom.

This isn’t a fringe argument. World-renowned urbanist Richard Florida calls economic development subsidies “useless.” It’s also not a partisan issue, with institutions ranging from the Center for American Progress on the left to the Mercatus Center on the right regularly calling for reforms. Even public-sector unions are beginning to take public stands against these programs, seeing them as pocketbook issues for their members.

Yet the subsidies endure, because they create all-important jobs for politicians and bureaucrats who run them and generate campaign contributions from the companies that receive them. The evidence is clear that there’s a direct relationship between politics and subsidies:

  • The biggest determinant of whether a state will have a sudden increase in big subsidy deals isn’t the economic conditions on the ground or the needs of local industries, but rather whether an incumbent governor is facing re-election.
  • These deals deliver electoral benefits: on average, an incumbent governor can improve independent voter intent for their re-election by more than 9 percent by announcing a subsidy deal to “create” 1,000 new jobs.
  • It’s not just governors: cities with elected mayors tend to offer larger incentive deals—with looser oversight—than cities with appointed city managers.

Once the ribbon cutting ceremony is over, the last thing politicians want is for these taxpayer-funded, politically motivated deals to be held accountable. That’s why states and municipalities go to such incredible lengths to stash subsidy spending in economic development authorities, corporations, and other special entities that complicate transparency and accountability. Of course, this means that when those walls come down and the sunlight shines on the bureaucrats, it’s commonplace for official government auditors to uncover gross mismanagement and massively inflated economic impact claims:

  • A recent audit found that the Wisconsin Economic Development Corporation only created roughly 35 percent of the jobs it promised in 2018 and “cannot know how many jobs were actually created or retained” because of basic information gathering failures.
  • The New Jersey Economic Development Authority overstated per-deal economic impact by as much as $11.2 million, awarded $29.2 million to a company that actually decreased employment in the state, and had dozens of other analysis and oversight failures.
  • report on the Michigan Business Development Program found program managers overstating its return on investment by at least 30 percent, and caught bureaucrats not making companies provide any documentation of hiring claims despite a law requiring that they do so.
  • Georgia’s massive film tax credit program handed out more than $60 million in tax credits for ineligible productions or expenses. That didn’t stop politicians from artificially doubling the credit’s economic impact claims and taking credit for subsidizing “film industry” jobs such as movie theater concession workers to the tune of $119,000 per job. Meanwhile, auditors discovered that Georgia’s taxpayers had subsidized “production expenses” that included parking tickets and “lost petty cash” thanks to virtually nonexistent oversight. All told, the program cost every taxpaying household in Georgia an estimated $220 per year, with no end in sight.

If the purpose of these programs was to create jobs or grow economies as advertised, none of this would make sense. However, these are exactly the kinds of results you would expect from political patronage programs.

We know too much about these programs and our communities have too many challenges ahead of them for us to allow America’s state and local subsidy programs to be used for their usual political purposes. This is the time for voters to start questioning whose job is truly being “created or saved” by a new subsidy deal: theirs or their elected officials?

John C. Mozena is the president of the Center for Economic Accountability.



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