Opinion: billions are being wasted in economic development subsidy wars

(Editor's note: this originally appeared on Governing.com)

Seeking to create jobs and help their local economies climb out of the pandemic recession, state and local officials are raising the ante on subsidies to big corporations. But if history is any guide, ever-increasing tax breaks and other economic development incentives will likely lead to slower — not faster — growth. Given state and local governments have already been wasting $95 billion every year in an economic race to the bottom, more subsidies will just dig the hole deeper.

Take New Jersey, for example. It made national headlines when its previous state subsidy program collapsed in corruption and scandal, but the state recently replaced it with an even larger $14 billion program. And this spring North Carolina announced its largest-ever subsidy: $865 million in its successful bid for Apple’s first East Coast research and development center and the 3,000 new jobs the company promises to bring.

Adding thousands of local jobs is great news, but why pay Apple to do something it was probably going to do anyway? It’s a lesson for anyone who values good government over political grandstanding.

Smart companies like Apple understand the real long-term attraction is not subsidies so much as the great economic foundation North Carolina has built: investments in top-notch research universities, a tech-ready workforce and a business-friendly environment. North Carolina is indeed a perfect place to locate a cutting-edge research center. Site Selection magazine has consistently ranked it as a top state for business climate.

Nor is this the first time North Carolina has been in the running for one of Apple’s expansions. In 2018, the Research Triangle was passed over for Austin, Texas, despite North Carolina lowering eligibility requirements for supersized subsidies available through a special program. Ironically, that program was initially developed to attract Foxconn’s infamous Wisconsin factory. Sometimes failure is luck in disguise.

In fact, most wins in the interstate subsidy wars are Pyrrhic victories. It’s pretty clear North Carolina overpaid when you compare Apple’s newly approved project with the larger Austin facility, which only received a combined $41 million from Texas state and local governments. Here’s an apples-to-apples comparison: Texas gave Apple about $10,000 per job. North Carolina has promised about $288,000 per job. That seems a bit too “business-friendly.”
Apple’s new R&D center had another suitor as well, but Ohio’s supposed competition for the project may have caused North Carolina to fall victim to the same trap that befell South Carolina almost 30 years ago. In 1992, South Carolina was the favored site for a new BMW manufacturing plant when Nebraska intervened with a much larger subsidy offer. Despite Nebraska not meeting critical facility needs, such as access to a port, panicked South Carolina politicians more than quadrupled their initial offer, and the economic development arms race claimed yet another victim.

Adding insult to injury, academic research finds that only one in eight subsidies are likely to change a company’s location or expansion decision. That means almost 90% are a complete waste of money. Companies certainly want subsidies if they can get them, but care more about local talent, region-specific advantages and access to supply chains and customers. For example, Google and Fidelity Investments recently announced expansions to their existing operations in the Research Triangle — without asking North Carolina for subsidies. Both emphasized the area’s skilled workforce as the primary draw.

The consensus of academic research is corporate handouts don’t create broad benefits for the community providing them. That’s because subsidies motivate wasteful corporate investments and create public funding trade-offs. Every dollar spent on subsidies is a dollar that can’t be used to improve infrastructure, education or public safety, or to cut taxes on smaller businesses and households.

With such a clear case against handouts, how did we arrive here? It turns out when Mississippi fired the first shot in the subsidy wars with its “Balance Agriculture with Industry” program of the 1930s, the political rationale was much like today’s: helping the state recover from the Great Depression.

After Mississippi broke the economic truce originally brokered in the Constitution to lure northern manufacturing companies south — like a game of musical chairs directed by subsidies rather than party music — other states responded in kind. Unfortunately, the losses these programs create don’t stay local, because most subsidies also reduce national economic growth.

Why are governments today still stuck in this state of dysfunction? Politicians suffer from a “fear of missing out” that traps them in this endless — and fruitless — competition. But some principled leaders are joining forces to find a solution. Fifteen states have already introduced legislation to leverage an option granted by the Constitution: an interstate compact that would phase out corporate giveaways. It’s a way to free up the billions annually wasted on subsidies and unleash the economic growth we don’t even know we’re missing.

Politicians are understandably trigger-happy about the economy after a tough recession, but declaring a ceasefire would do a lot more to improve economic growth.

Michael Farren is a research fellow with the Mercatus Center at George Mason University. Philip St. Jean is an economist and financial planner.