How to eliminate corporate welfare

Lawmakers find themselves in a dilemma when Amazon or any other big-name business comes to town looking for favors. They’re pressured to ante up with a package of taxpayer-paid goodies to avoid the risk of losing the business to another state. It’s a sucker’s game, but they feel forced to play along. In reality, they don’t have to play. Together, they can agree to stop these shenanigans.

An interstate compact that functions a lot like a multilateral disarmament treaty would help eliminate corporate handouts. It would allow states to keep their subsidy programs until enough of their competitors agree that this kind of interstate competition is harmful.

{mosads}The trick is to ensure that all corporate welfare is accounted for. Legislators and administrators are more interested in obscuring the costs of transfers to select businesses than in justifying them. For example, Michigan uses 23 different terms to describe the state’s support for business. But its 164-page annual report on corporate handouts uses only a single footnote to acknowledge that the support comes from taxpayers.

And it doesn’t end there. The language used to explain corporate handouts also gets murky. To some people, all business tax cuts are handouts. But broad-based tax cuts are changes to the business environment that affect all businesses, not just those businesses favored by politicians.

Corporate welfare, however, is targeted; politicians pick winners and losers in the marketplace and extend favors to the chosen. If it’s a tax exemption for data centers, transportation businesses located near airports, or another type of business singled out by politicians, then not every business is affected. That, and not tax changes that affect every business, is corporate welfare. But if it’s a program that hands out cash to early-stage companies in the state, it is corporate welfare.

Corporate welfare programs are not about economic growth. Economic growth happens when people put resources to better uses to satisfy their wants and needs through mutually beneficial choices. Even if corporate welfare had no taxpayer costs, it moves businesses away from their best mutually beneficial private arrangements. On top of that, it’s even more ineffective since it spends taxpayer dollars that could be better used elsewhere.

Stopping this practice ought to be the business of the federal government. Programs and policies that affect interstate commerce are exactly the kind of manipulation of trade between the states that the Framers of the Constitution wanted to prevent. But absent a congressional fix, states can do it themselves.

There is broad opposition to these programs across the political spectrum. Progressives don’t like the transfers of wealth to wealthy business owners. Conservatives don’t like having everyone’s taxes given to the political elite. Libertarians don’t like interference in the economy. And pragmatists decry the waste and ineffectiveness.

But even with varied opposition, the political calculus for them is strong. Jobs are popular. Corporate handouts give politicians an opportunity to show up at a groundbreaking event. Helping your community provide a better quality of life and crafting a better business environment, in contrast, doesn’t create the same direct connection between a political action and any company’s expansion. No ribbon-cutting ceremonies take place when positive economic data is announced.

There is a way for states to come together to stop this race to the bottom. They can agree that this is not the kind of competition that they want, and work in tandem to put a stop to it.

James M. Hohman is the director of fiscal policy at the Mackinac Center for Public Policy, a research and educational institute located in Midland, Mich. Follow him on Twitter @JamesHohman.