How far a government should go to provide economic support to a private business–whether it’s moving, closing, shrinking or growing—seems to be a never-ending question in Minnesota. Proponents of subsidies, tax breaks and creative financing plans present convincing arguments that shouldn’t be quickly dismissed.
Such measures, though, should be examined for how they might affect economic activity in the medium and long run. Consider the following situations:
A large local subsidiary of an out-of-state company is slated for sale or liquidation.
If liquidated, the state will have to pay millions in unemployment compensation to the laid-off workers and sales tax receipts in the affected communities will plummet.
Wouldn’t it be cheaper for the state to chip in directly with a payment to someone who is willing to buy the operation and keep it open? Wouldn’t that save money and promote a sound economy?
Yes, if the business fails, the state unemployment trust fund will take a hit. And depending on how long it takes displaced workers to find new jobs, the sum of unemployment payments can be substantial.
But if it’s clear that the state will pony up funds or abate future taxes, it’s hard to keep such public expenditures from being included in how the seller figures the price that the selling company is able to get.
In the case of Fingerhut, various buyers are bargaining with Federated Stores to sell them the Fingerhut operation rather than closing it down.
If the state of Minnesota makes an offer of aid, Federated negotiators would be fools not to take such anticipated aid into account when estimating how much to hold out for. State aid to help preserve jobs would largely benefit Federated stockholders.
Moreover, such assistance is only considered for large firms. Stepping in with a subsidy when 5,000 workers are involved but not when the number is 50, skews the business playing field in a way that is both inequitable and inefficient.
A commercial area in a 1950s suburb is looking increasingly tacky, and businesses have largely moved away. A major corporation, though, wants to build an office building there, but it wants a subsidy.
The new $150 million building will generate millions annually in real estate taxes, much more than the pittance paid by the run-down burger joints and hardware stores that it would replace.
Why not take the additional taxes the new office building would generate for the first 10 or even 20 years and give it back to the company to make sure they build here? After all, that tract isn’t bringing anything into the city coffers right now, and the new building will generate megabucks even after the tax-abatement period is over.
Called tax-increment-financing, this tack is similarly logical.
However, when it’s well known that such aid is generally available, companies can play municipalities off against each other looking for the biggest aid package.
There’s not necessarily any net increase in construction or jobs in a particular state or metropolitan area.
Furthermore, such assistance is usually available to large firms for large projects. A corporation with billions in annual revenue has negotiating power with municipalities. A small business that wants to grow doesn’t register.
A few dozen of the small, struggling firms together may do more to increase employment and income in the long run than one large mature firm, but it’s the large mature firm that gets taxpayer aid.
A major league ball team wants a new stadium.
The players pay millions of dollars in a variety of taxes. The players on visiting teams even get socked for income tax on a pro-rated portion of their earnings.
If government doesn’t kick in to help build a stadium, the team will move somewhere else and some other state will collect those taxes.
We may be worse off fiscally and won’t have the home team anymore.
This has the most practical validity.
The number of such teams is limited. With recent trends in player salaries, having a major-league team in a state with a personal income tax can bring in large amounts of tax revenue for the state.
Economists who’ve examined the matter say this is one case where the net state subsidy is substantially less than it seems.
Purists say that there should be a federal law banning subsidies to private businesses such as ball teams to end the whipsawing that leagues practice.
If they were no longer able to play one city off against another, owners who are willing to pony up hundreds of millions of dollars in annual player salaries would somehow find the $300 million to build a facility that lasts for decades.
But we do not have such a law, and in its absence, states need to recognize that the Seligs and McCombses of the world have some bargaining power.
© 2002 Edward Lotterman
Chanarambie Consulting, Inc.