American state and local governments hand out more than $70 billion every year in economic development subsidy and incentive deals. That’s enough to cover the 10 smallest state budgets, combined. But while economists broadly agree that most of this money is wasted, a combination of political pressure, big-money interests and bureaucratic inertia makes unrolling the entire economic development industry a gigantic challenge for reformers from across the political spectrum.
It’s unfortunately too much to ask for more than 540 state, local and regional economic development bureaucracies across America to close up shop and go find honest work tomorrow simply because the evidence shows that they’re ineffective at best and harmful at worst. It’s unrealistic to expect politicians to stop cutting tax credit deals so long as voters believe that they’re “creating jobs” by doing so. And we certainly know that companies will keep cashing incentive checks as long as we’re willing to keep writing them.
That doesn’t mean we don’t have a starting point for cleaning up this toxic swamp of big business and big government interests. We can start small – if hundreds of millions of dollars is “small” – by using simple common sense to end state subsidies for three especially toxic economic development sinkholes: Stadiums, data centers and distribution centers.
Why these three? The common arguments in favor of incentives are that they create economic activity in an area, that they create jobs and that they change companies’ decisions about where to locate. But stadiums don’t create economic activity, data centers don’t create jobs and distribution centers have to go where the customers are.
Stadiums don’t create any meaningful economic impact for anyone other than the teams that play there, largely because they’re empty and inactive far more often than they’re not. Even a high-attendance MLB baseball stadium with 81 home games brings in fewer customers per year than a single mid-sized Walmart store that’s open all day, every day. Yes, game days are great, but it’s hard to build much local growth around something that’s going to be empty for months at a time. The reality is that we subsidize sports teams because we love them, not because they’re a good investment. And as anyone who’s ever lent money to a family member can tell you, love is a poor reason to make a financial decision.
Stadiums are falling behind in “bad economic development idea” standings, though. The rise of cloud computing has created a demand for data centers, essentially large warehouse-like buildings near the telecommunications network “backbones” of the Internet. They’re full of expensive computers and industrial air conditioning that require massive amounts of electricity. While that makes them expensive to build and operate in terms of capital costs, they’re terrible at “job creation” because they simply don’t employ many people to sit around watching lights blink on servers that are being remotely managed by programmers in Silicon Valley, India, China or elsewhere. Data center companies look for places that have the right network infrastructure, cheap energy, cheap land and few natural disasters. They then hit up governments for subsidies, and politicians who love to take credit with voters for “high-tech jobs” gladly comply. In states like Iowa and Utah, the cost of some data center deals has reached $3 to $4 million per subsidized job.
Just as e-commerce has created a need for data centers powering the websites where you do your shopping, it’s also created a demand for distribution centers from which the drivers depart each day to deliver the products you ordered to your door. The more stuff you order and the quicker the retailer promises to get it to you, the closer they need to have that distribution center to your home. This makes state-level incentives to attract distribution centers pointless, as those facilities are going to be located where the customers are — and not where they aren’t. An online retailer isn’t going to put its distribution center someplace where it doesn’t have customers to serve any more than a lumber company is going to set up a logging camp in the desert, no matter how big a tax incentive they’re offered.
Stadiums, data centers and distribution centers aren’t the only bad economic development deals out there. But if we want to stop draining money out of government budgets and burdening other taxpayers for no good reason, making those businesses pay their own way is a great place to start.
John C. Mozena is the president of The Center for Economic Accountability.