Economic Development Subsidies

I stumbled across an old piece from the Drum Major Institute which discusses the problem of billions of dollars in incentives being given to companies in return for locating within a state and the small amount of accountability for them in delivering the promised results.

To help deal with this problem, the state of Minnesota passed a first-in-the-nation subsidy accountability law. The following quote describes the components of the law as well as some additional information about it’s passage:

• Communities and public agencies that provide economic development subsidies must develop uniform criteria for all their subsidy deals, including a specific wage floor for these jobs.
• Public hearings must be held before business subsidies worth more than $100,000 are awarded
• All businesses receiving more than $75,000 in loans or $25,000 in other subsidies must enhance jobs or create a net increase in jobs in Minnesota within two years; subsidies to retain existing jobs are permitted only if the job loss is “specific and demonstrable;”
• Businesses receiving subsidies must continue operations on the site for at least five years;
• Businesses that fail to meet job creation and wage goals must repay the subsidy with interest and face other financial penalties, and be barred from receiving future subsidies in the state;
• Subsidy agreements, including the type, public purpose, and amount of assistance, as well as specific job and wage goals and the date they need to be reached must be disclosed annually to the public
• Progress in achieving the goals of each subsidy and information on businesses that did not meet goals must also be disclosed.

The Minnesota Alliance for Progressive Action, a coalition of unions, environmental organizations, and other advocacy groups, pushed for legislation. In 1995, Senator Hottinger and his counterpart in the State House of Representatives, Karen Clark, sponsored a bill requiring that any business receiving state or local government assistance worth more than $25,000 create a net increase in jobs in the state within two years or pay the money back. The law also required public reporting of subsidy deals, including the goals of the subsidy and the results.

I am a big fan of another policy proposal along the same lines of these subsidy accountability programs. Brad Carson discussed this idea in Democracy Journal. The concept is for local governments to receive stock equity or something similar in the companies that they bring in through subsidies. The money generated from this stock then goes into a governmental fund to finance incentives for the next company. It is a good system that holds companies accountable for the promises they make while also giving governments a chance to remain competitive in the national economy.