U.S. Representatives Mark Pocan (WI-02) and Lloyd Doggett (TX-35), Ranking Member of the U.S. House Subcommittee on Tax Policy, wrote to the U.S. Government Accountability Office (GAO) expressing concerns about economic development subsidies.

The Center for American Progress released a new issue brief on the realities of the subsidies provided to Foxconn Technology Group in Wisconsin as business incentives, highlighting potential downsides that rarely are fully appreciated by policymakers, the news media, or the general public.

“Economic development subsidies may make great fodder for elected officials and the press, but it’s time to take a closer look. Too often, these deals are opaque, lack requisite oversight, fail to deliver promised results, and may unfairly increase the burden on taxpayers,” said Andrew Schwartz, author of the brief.

CAP’s issue brief outlines the following realities around economic development incentives:

Economic development incentives often are not crucial to where firms locate. Businesses consider a wide variety of variables when deciding where to locate a headquarters or a branch, including real estate availability, workforce and education, infrastructure, access to markets, community, and quality of life.

State and local taxes, however, which average less than 2 percent of the total costs of doing business nationally, are not a major consideration, according to research conducted by Good Jobs First and the Iowa Policy Project.

Benefits from incentive deals may not live up to the promises.

The announcement of potential deals almost always includes the number of jobs and the amount of total investment. However, these rosy projections may not be borne out, as firms may change their business models or even go out of business altogether.

Subsidies may result in diminished public services.

When state and local governments commit taxpayer resources to providing incentives, there are opportunity costs. In many cases, these include an inability to fund education, provide affordable housing, or contribute to “rainy day funds.”

Governments competing for businesses by providing incentives is often a zero-sum game.

It is bad tax policy to narrowly target subsidies that lead to differing tax incentives for companies in the same sector. State and local governments end up with a haphazard economic development strategy. Instead, a level playing field—paired with investments in infrastructure, workforce, and other public goods—would make a place more attractive to a wide variety of businesses.

Transparency and evaluation of incentives are minimal.

Incentives frequently happen through opaque processes, with little information on important aspects like total subsidy amounts. Taxpayers would not accept a comparable lack of transparency on infrastructure or education spending from a public entity; yet these tax expenditures receive minimal oversight, and governments sometimes even actively conceal information.

Specifically, Pocan and Doggett are requesting the GAO conduct a review and issue a report on the following questions:

  • Are there reliable empirical analyses of the net economic effects of these economic development subsidies? Based on any available evidence of economic development incentives affecting business location decisions, what economic impacts have such incentives generated?
  • To what extent have large federal economic development programs been used to provide incentives impacting business location decisions and what evaluations have the federal agencies conducted to determine economic impact? How does the federal government evaluate the effectiveness of economic development policies within the federal agencies? Have such evaluations taken into account the incentives provided by state and local governments in incentive packages provided to businesses?
  • What kind of coordination takes place among federal agencies, such as the Departments of Commerce, Agriculture, Housing and Urban Development and the Small Business Administration, and state and local governments?
  • Given the apparent expansion of such activities by state and local governments, what actions have federal agencies taken to enforce relocation and other provisions intended to ensure that program purposes are met?
  • What improvements can be made to processes at the federal, state and local levels to better understand the effectiveness of economic development programs and to what extent can federal authorities encourage further transparency in economic development?

“As incomes for the many workers have stagnated in recent decades, policymakers have looked to other tools to spur jobs and wages. Economic development has become a top policy priority. This is especially true at the state and local level, where elected officials have become increasingly willing to provide subsidies to incentivize business location or relocation as a means of job creation,” wrote Pocan and Doggett. “According to the Upjohn Institute, these subsidies have tripled since 1990. For example, in Wisconsin, Governor Scott Walker and the state legislature passed a law that would provide up to $4.5 billion in public funding to subsidize Foxconn, a Taiwanese electronics manufacturer. Under even the most optimistic assumptions, the state is not expected to break even on the deal until 2043, decades after these officials will have left office.”

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Lee Matz