In an effort to slow the spread of COVID-19, governors across the country intentionally shut down large portions of their states’ economies. One unexpected result of this decision was that a number of states stopped handing out special subsidies to woo businesses to cross their borders. And as governors now try to reopen society, they should continue the pause on subsidies. Indeed, lawmakers should consider making it permanent.
Michigan’s primary job-creation agency made more than 60 deals last year, but only three so far this year. Its administrators are marketing new relief programs instead. Maryland, likewise, has reduced its incentives game and been focusing on providing relief to businesses.
New Jersey hasn’t offered new deals in over a year. Its policymakers are debating whether to make new ones, and they haven’t agreed on what to do.
The reluctance to hand out taxpayer cash to select businesses during a pandemic, which also has strained state budgets, has not been shared by all state lawmakers and administrators.
Georgia has broadcast that the state is busy reopening itself as a place for TV and film production. The state spent a record $860 million last year on film incentives, and despite expected losses in revenue from other areas of the state budget, talk of capping the film subsidy program was quickly squashed. Even as this program continues to receive bipartisan support, lawmakers and taxpayers should be aware that a performance audit done by the state showed the “economic impact and jobs attributable to the credit has been overstated, even before considering the cost.”
Tesla’s impending move from California to Texas was met with around $60 million in combined tax breaks. But these may have been unnecessary, because Elon Musk said Austin was the No. 1 choice among his team members. Businesses generally consider broader factors, such as a healthy tax climate and quality of life, when choosing to relocate. As states look to rebuild their economies, they should focus on broad policies that help everyone, not targeted subsidy programs that only benefit a select few.
The COVID-inspired pause ought to cause lawmakers to revisit the strategy behind their programs, which were created to show that they are doing something about the economy. The key question is whether the benefits of the programs justify their costs. It’s rare when they do, and in states such as Michigan, these programs seem especially expensive.
The programs give a select few companies money at everyone else’s expense, which is fundamentally unfair, especially to other businesses in the same industry. Businesses that receive subsidies likely will be pleased, but their competitors surely won’t be.
Not only are select subsidies unfair, they’re also ineffective and expensive, so it’s good that some states have stopped giving away money through them. As states continue to reopen, businesses will start asking for special favors again, and it will be up to officials to decide whether to give them out once more.
It would be better if each state agreed to reopen without dispensing these favors, which are intended to shift decisions about where to locate offices and factories, moving them from one state to another. It’s a lose-lose game when business managers expect that every state will operate similar programs and make similar offers.
Lawmakers can reset these expectations by signing onto an interstate compact to eliminate their corporate welfare programs. Legislators across the country are considering such a compact; bills have been introduced in 14 states.
The pandemic stopped “business-as-usual” for most people, lawmakers included. They ought to reassess their old strategies as they reopen. If they can agree with each other that the competition for jobs shouldn’t be decided by whoever can offer the most subsidies, we’ll all win.
James M. Hohman is the director of fiscal policy at the Mackinac Center for Public Policy, a research and educational institute in Midland, Mich. Follow him on Twitter @JamesHohman.