Here’s how states can end corporate welfare
Get ready for a wave of corporate wellness. Lawmakers are back in state capitals and they will surely introduce and enact a slew of big business subsidies – a centuries-old tradition embraced by both sides but despised by taxpayers. Historically, it’s been impossible to convince lawmakers to do anything different, because they see freebies as essential to competing with other states. Yet there is a viable solution to this problem, and it is quickly gaining bipartisan support.
Lawmakers in as many as 22 states are proposing legislation that would create a statewide pact against corporate welfare, an idea that first surfaced in 2019. Essentially, the measures would permanently ban each state from handing out business subsidies, whether tax incentives, credits, allowances or direct cash payments. The pact would only come into effect once several states signed on to these bans, so none would have to disarm unilaterally in the fight to attract and retain business. Progressive lobbyist and Illinois native Dan JohnsonDan JohnsonDem wins Kentucky State House seat in Trump district won by 49 points Kentucky state legislator kills himself after denying sexual misconduct allegations: MORE report is the main advocate of this policy.
State and local government spending on corporate welfare has soared to at least $95 billion, up 200% over the past 30 years, and nearly twice as much as public protection funding against fires. Every state pays money to companies, and while most don’t report true totals, the evidence that does exist is deeply concerning. New York alone has distributed at least $40 billion to more than 135,000 companies in recent years. Five other states — including my home state of Michigan — have given more than $10 billion, and at least 35 states have spent more than $1 billion on business grants.
Research shows that such aids accomplish little or nothing. They can hurt economic growth because politicians are not well placed to determine which businesses will succeed or fail. They usually don’t create the number of jobs promised because the economy is constantly changing and politicians can’t see the future. More importantly, corporate welfare is unnecessary, since up to 98% of businesses would have moved to or remained in a certain state without the involuntary assistance of taxpayers.
But sound public policy is not the issue. Politicians – left and right – are using corporate grants to make big announcements. Convincing a big business to move in or stopping a local legend from leaving is thought to help come the next election.
Hence the monster subsidies of recent years. In 2017, Wisconsin offered $2.9 billion in grants to help Foxconn build a $10 billion factory, part of a blatant bid by former Gov. Scott Walker to look good on the issue of jobs. Amazon is famous for pitting decent-sized US cities against each other in the search for its HQ2 location. Lawmakers in the two winning cities, Virginia and New York, respectively pledged at least $750 million and more than $1.5 billion. Across the country, politicians routinely funnel taxpayer dollars to corporations that are synonymous with their state — see Boeing in Washington, the Big Three automakers in Michigan, and the oil companies in Louisiana.
Yet the massive – and increasingly visible – growth in freebies is finally creating a public backlash. Voters don’t want politicians giving taxpayers’ money to companies that often add billions in shareholder value while paying little tax. In Wisconsin, Walker lost his 2018 re-election bid in part due to widespread opposition to the FoxConn deal, while public outcry prompted Amazon to pull HQ2 from New York. Florida lawmakers have even cut funding to Enterprise Florida, one of the state’s top grant providers. Texas lawmakers recently scrapped one grant program altogether, though others remain.
Corporate welfare becomes increasingly difficult to justify, making it easier to conclude an interstate pact. Sensing the public mood, Democratic and Republican lawmakers in states such as Michigan and Rhode Island joined forces to ban it. The Utah House of Representatives passed the bill in an overwhelming, bipartisan vote of 63 to 3 in 2020, and the head of the state’s incentive program has come out in favor of their repeal. The outpouring of support from both sides of the aisle is impressive, especially for such a novel idea, and a record number of state lawmakers are expected to support a statewide pact in their 2022 legislative sessions.
Realistically, a full-scale corporate welfare ban is still years away, as several states must pass legislation before the pact takes effect. Yet the case for action is growing stronger, and opposition to corporate subsidies is growing in popularity. States should compete on quality of life and their overall economic climate, not on the taxpayer dollars they can spend on big business. The sooner this realization becomes reality, the better.
James M. Hohman is director of fiscal policy at the Mackinac Center for Public Policy, a research and teaching institute in Midland, Michigan. Follow him on Twitter @JamesHohman.