November 25, 2019; Wisconsin Public Radio
Former Wisconsin Governor Scott Walker spoke for many government officials when he proudly announced in 2017 that in return for more than $3 billion in tax and regulatory incentives, the electronics manufacturer Foxconn would be building a factory in his state. “This is about far into the future. This is about ensuring our children and our children’s children will have generational opportunities. This is one of those things that’s transformational.” Such a confident statement, with so little to back it up.
In return for granting corporations special benefits, cities, states and the federal government seek to bring needed economic development into their territory and keep it from moving elsewhere. This seems like the right thing to do, but is it?
The high cost of convincing a business to invest in a community, whether it is Foxconn in Wisconsin, or Amazon in Virginia, or building a mega-real-estate project in Chicago called Lincoln Yards, or federal Opportunity Zone incentives, might be money well spent—if such efforts are the only way to accomplish their objectives and if the results fulfill their promise. A new study just released by George Mason University’s Mercatus Institute adds to the weight of earlier research telling us that financial incentives do not work.
Counterintuitively, the investment decisions of corporations are not heavily influenced by incentives, even large ones. According to the Mercatus Institute study, “In selecting its second headquarters, Amazon rejected much higher incentive packages offered by Cleveland and Ohio ($3.5 billion), Newark and New Jersey ($7 billion), Maryland ($8.5 billion), and Dallas–Fort Worth Airport ($23 billion) to initially select New York ($3 billion) and Virginia ($1.05 billion), only to later walk away from New York. The choice to forgo higher subsidies may seem surprising; however, when it comes to facility location decisions, other factors such as labor costs, business logistics, and access to region-specific resources are often far more important.”
Michael Farren, an economist and head researcher of the study, told Wisconsin Public Radio that “for the typical subsidy, it only matters between 2 and 25 percent of the time.”
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The Mercatus study also found that incentives push companies to ignore basic marketplace realities that may make the future success difficult.
“Subsidies can encourage a firm to ignore its or its region’s natural comparative advantage, oblivious of what economists have called ‘regional realisms,’” the study found. “If it doesn’t make sense to build LCD displays in the US or even in southeastern Wisconsin, then it shouldn’t be done,” Farren said. “And if you try to force something to happen, then you are going to end up with more economic waste.”
For these reasons, incentives do not often bring the promised economic benefits. This will not be a surprising conclusion for NPQ readers; last year, Derrick Rhayn highlighted the work of economist Timothy Bartik, who found that “incentives are still far too broadly provided to many firms that do not pay high wages, do not provide many jobs, and are unlikely to have research spinoffs. Too many incentives excessively sacrifice the long-term tax base of state and local economies. Too many incentives are refundable and without real budget limits.”
This is well illustrated by a recent audit of Wisconsin’s efforts to build its job base through business incentives found “that recipients of 68 tax credit and loan awards…created 2,084 of 5,970 contractually required jobs (34.9 percent) [and] retained 7,806 of 13,272 contractually required jobs (58.8 percent).”
With little evidence to support the wisdom of investing in corporate subsidies, why do decision-makers continue to support them? In another example of what makes good politics, even if not based on fact and knowledge, “Voters, especially independents, were more likely to vote for an incumbent… who had successfully attracted a large corporate investment,” with an “even bigger boost among independent voters.”
Thus, the appearance of doing something to solve the difficult problems in our economy currently seems as important to politicians as actually making progress. As long as nonprofits do not roundly argue the real facts—like local taxpayers being played for fools—the habit of addressing our local economies with these quick but ineffective “fixes” is likely to go on.—Martin Levine