There are many euphemisms for ‘bribe.’ Depending on the country it may be ‘baksheesh,’ ‘blat,’ ‘speed money,’ ‘propina,’ ‘an envelope’ or ‘chai.’
Here in Minnesota we generally say “economic development incentives.” We seem to think that if payoffs are reported in the newspapers, everything is fine. But ad hoc subsidies for companies to do things they were likely to do anyway are unfair and corrode economic efficiency.
State and local subsidies to induce Thomson Corp. to expand its facilities in Eagan are the latest example of the problem. Thomson wants $8.7 million from the state, ostensibly delivered as an exemption from sales taxes on material used to construct and equip the new facilities. It would like another $1.5 million in Tax Increment Financing.
Officials in Eagan and the Pawlenty administration tout this payoff as a great deal for Minnesota. It is not.
Proponents argue that subsidizing a private firm like Thomson to build new facilities will increase employment and economic activity. These in turn will lead to more income or sales taxes flowing into state and local coffers. These increased revenues will more than repay the up-front $10.2 million subsidy. We will get something for nothing. There truly is a free lunch.
These arguments are attractive but false. Nobel Laureate Milton Friedman repeatedly reminded us that without a reduction in government spending, there can be no tax decrease. So-called “tax cuts” usually just shift the tax from one group to another.
That is what will happen in this case. The state of Minnesota will not spend less money if Thomson builds, nor will Dakota County nor the city of Eagan. They are likely to pay more, especially as local government ponies up large sums for infrastructure, public safety and other local services.
Someone has to pay those costs. The burden falls on existing households and businesses. Property owners in jurisdictions affected by the project will have to pay more in real estate taxes than they would otherwise. All Minnesota households and businesses will have to pay more in sales or income taxes.
Any boost to the economy from a subsidy to a large firm is offset by the economic disincentives placed on all other taxpayers. Other firms, nearly all smaller, have to struggle under a higher burden. At best, the outcome is a wash with no net increase in employment, output or tax revenue. More commonly, the net effect is a reduction in economic activity because resources are used less productively.
The Thomson deal will cost citizens $10 million for 2,000 jobs. That is $5,000 per job. If a $5,000 initial subsidy creates a new job that will pay for itself, why do we limit the subsidy to a few big operations that have the political clout to get what they want?
If the ready-mix concrete plant in Pipestone hires four more people, send them a check for $20,000. If my cousin hires a full-time worker for his dairy farm, send him $5,000. After all, it won’t cost us anything.
Study after study shows that subsidies like the one proposed for Thomson don’t add anything to the national economy as a whole. They usually add little to the individual state involved. They can benefit the city and country where some new facility is built. There lies the rub. That is why Eagan officials are eager for Minnesotans to plunk down $8.7 million so a new building will go up in their town. And that is why the argument “we have to subsidize these big firms or they will go somewhere else that will,” has some validity.
Competitive subsidy wars between the states for big companies are a beggar-thy-neighbor game that makes our nation worse off. But an individual state can benefit. That is why, in the early 1990s, Art Rolnick of the Minneapolis Fed and then-U.S. Rep. David Minge of Minnesota carried out a crusade for national legislation to limit such competitive subsidies.
Rolnick and Minge gave it a great try, but their pleas fell on deaf ears. And so we increasingly see firms lining up to get their share. We already gave similar subsidies to $50 million, $60 million and $75 million facilities in Granite Falls, Fairmont and Albert Lea respectively. Now Thomson wants comparable subsidies for its $100 million project in Eagan.
The Legislature is not likely to nix the request. It could do one small thing however. Call a spade a spade. Just write out a state check for $8.7 million and write “subsidy” on the memo line in the lower corner. Forget the self-deceptive lie about it being a sales tax “exemption.” If we are going to pay a bribe, let’s be honest about it.
© 2007 Edward Lotterman
Chanarambie Consulting, Inc.