Study: More Harm Than Good from Targeted Business Incentives

Published June 2, 2014

Although most empirical studies on tax incentives “find that they have little or no effect on employment or the economy as a whole,” states and local governments have been steadily increasing the number of taxpayer handouts to select businesses. The practice “sows the seed of cronyism, the established practice of exchanging favors between powerful people in politics and business.”

So write the authors of a new study on targeted tax benefits for businesses published by the Mercatus Center at George Mason University. “The Political Economy of State-Provided Targeted Benefits,” by Christopher J. Coyne and Lotta Moberg, found large and politically powerful businesses often benefit from these at the expense of smaller and less politically connected businesses and consumers and taxpayers.

Coyne and Moberg also found most states do a poor job evaluating the true costs and results of targeted incentive programs, including the unseen and often unintended consequences of using government policy to steer money to some businesses and locations and away from others.

‘Institutionalizing Cronyism’

In an email interview, Coyne said he and Moberg launched the study “after realizing that these policies had costs which very few people were discussing. What surprised me most was the one-sided nature of targeted benefit policies. Even the term—’targeted benefits’—implies that these policies are a net benefit to taxpayers. The reality is that they often aren’t.

“On top of that, the use of these policies sets off a series of unintended consequences by incentivizing lobbying, which can institutionalize cronyism. The broader issue is that cronyism undermines the very foundations of what makes a market economy so dynamic and effective: competition driven by the profit and loss mechanism, not by political favoritism.”

Wal-Mart, Apple, Google Cited

The study gives as an example Wal-Mart, which has received “at least 260 special benefits in the United States, worth over $1.2 billion in total.” Although this helps Wal-Mart, it hurts the company’s competitors. The authors note evidence showing “while a Wal-Mart store generates an average of 100 jobs, 50 jobs also disappear as other retailers are outcompeted.”

Then there’s Apple, which in 2007 received $370 million of incentives to locate a facility in North Carolina. With a promise of 50 employees at the facility, the cost comes to $7.4 million per employee. North Carolina that year also promised $255 million of incentives to Google.

“If a state really is a good location for a particular firm, there should not be a need for the government to lure it with targeted benefits,” Coyne and Moberg write in their study. “Established companies like Google and Apple surely do not need help covering the start-up costs. More generally, nobody knows what the dominant industries in the future will be. Neither can anyone foresee which companies will deliver large positive external effects on other companies in the same state. . . . [P]olitical actors have an incentive to invest taxpayer money in large-scale, observable investments that appear to contribute to economic activity and wellbeing—even if they do not.”

‘Risk of Undermining’ Economy

Coyne said he believes most policymakers have good intentions but “contrary to their intentions, they run the risk of undermining the dynamism and competiveness of their economy by allowing political competition to replace economic competition. If they are concerned about attracting businesses to their state or municipality, they should focus on general rules that apply equally to all. What regulations, rules, taxes, etc. are preventing businesses from moving to your area? And how can they be changed to make your state or municipality more attractive? This is more effective than selectively choosing some recipients for government handouts.”

He added, “I do think this is an area where both the right and left can, and do, find common ground. The reason is that targeted benefit policies not only undermine free markets [an issue near and dear to those on the right] but also tend to favor businesses that have political connections and resources to lobby at the expense of taxpayers and businesses that don’t have these connections and resources [an issue of particular interest to those on the left].”

Internet Info

“The Political Economy of State-Provided Targeted Benefits,” Christopher J. Coyne and Lotta Moberg, Mercatus Center: