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.
Gollee, that does sound good! (What is it about Minnesota and good ideas?)Report
They’re on lease from Canada.Report
“All businesses receiving more than $75,000 in loans….” I assume that refers to government loans?
The idea seems good on the surface, although I’m concerned about how it might work in practice. I also like your idea of local government having some equity in the new ventures, but again, I’m concerned about how it might work in practice.
My concerns are admittedly inchoate. There might be a danger here of the new, subsidized ventures capturing government. And I wonder if, when the punitive provisions need to be invoked, the legislature might just enact special legislation to exempt the venture. I really don’t know, however, and the ideas seem interesting.Report
Agreed. Excellent post.Report
I’m highly skeptical of subsidies to get a company to move to a certain state. Those are usually based on undercutting workers in another state and just lead to a race to crappy working conditions for all. There are also plenty of good arguments for having fewer subsidies for business in general. And lordy having the people buy stadiums so very rich people won’t move their sports teams is a rip off and losing proposition. I think the Minn proposal and Mike’s idea are good. I also know exactly how Mike’s proposal would be slammed and why it would have great trouble getting through. It would rhyme with bocialism.Report
we have a subsidy for movies here… we’re getting some actual tech jobs that’ll make sure that everything they can do in hollywood they can do here. plus the ETC is teaming up with one of the big hollywood studios. Within an year or two, we’ll be better for post-production than NYC.
Are you also skeptical of non-profits? 😉 They get a BIG freaking subsidy…Report
Non-profits are set up that way to serve a public/charitable purpose. They get a break to make it possible to do some sort of good work that wouldn’t happen other wise. Having worked in non-profits I’d always joke about non-profit means none of the employees is ever going to make much money.Report
the nonprofit I work for pays multiple people million dollar salaries.
About the only good I can say about them is that they keep lotta jobs in the city so they don’t lose their nonprofit status.Report
“Those are usually based on undercutting workers in another state and just lead to a race to crappy working conditions for all. “
Greginak – I think you are on to something but I don’t see another model that would work. Competition is generally a good thing except when it becomes a battle of subsidies. That seems a little unfair.Report
I’m fine with competition but “a battle of subsidies” is exactly what happens. Whether its no taxes or direct payments that is often how states get business from other states. Its not the best example but sports team owners have raised the threat of moving to get localities to pay for new stadiums. I’m not really suggesting another model. I think it would be best if places competed with each other based on having well educated workers, great infrastructure, being nice places to live, best beer, hottest men/women, etc. However we can’t legislate how people compete and its easier to offer freebies than other things. Here is Ak, the big oil companies always raise the specter of going to drill for oil someplace else unless the gov lowers their taxes or offers some benefit.Report
I guess one could argue that the previous successes of the states allow them to have more money to subsidize the next business. Or they just subsidize as a kind of gamble (which often doesn’t pay off).Report
Hmmm. I know that at least one other place did something like this. I remember reading an article about how they had to return a lot of the money because they didn’t hire enough people. I’d actually thought that the existence of such things were standard, though actual enforcement varies.
Of course, these policies are generally deadweight loss anyway, aren’t they? I mean, advantageous to the city or state, but primarily in a zero-sum way. Unless they’re going from Washington to South Carolina instead of Washington to India or something.Report
Yes, totally. It’s exactly those kind of concerns that led me to convert to believing the best thing would be to reduce or eliminate taxation of business/personal income and developed property to the greatest possible extent in favor of taxes on consumption and land.Report
Make sure you include Ben & Jerry’s in your analysis.Report
A very common form of subsidy is forgoing property taxes for some period of time. I’d consider the lost tax revenue as a subsidy and place it under the same rules.Report
Don’t forget to include water and sewer service, police and fire protection, road maintenance, libraries, schools, and “other government services” in your list of subsidies.Report
Those things can provide a baseline without being considered a subsidy.
Once they require capital outlays to provide, they’re a subsidy.
If you provide standard water and sewage service to a restaurant, that’s not significantly different than the water and sewage service provisioning you’d supply to any building in that zone. On the other hand, providing waste removal and water provisioning services for a skyscraper are a whole ‘nuther kettle of fish.Report
Back in WI the typical thing was the TIF (tax-incremental financing) where the city floats or guarantees a loan for parcel development. The increased property tax revenue (caused by the higher taxable value of the parcel once (re-)development is complete) is diverted to pay the loans or bonds off for a fixed period, after that, the taxes just flow to general funds. It’s not quite the same kind of subsidy but they were definitely subject to rampant abuse/overuse.
My understanding is in other states, a lot of subsidies for development take a similar path but often vary in the details.Report
If a bar has a No Cover For Girls Night, it’s not because it thinks having lots of chicks around is awesome. It’s because they want the men to show up and buy the girls drinks. However, if they don’t sell as many drinks as they hoped, they do not retroactively charge the girls a fee for having entered the club.Report
But, if it consistently happened, the bar would stop No Cover for Girls Night, instead of claiming the problem was that the men are too lazy and that the women are “drink creators.”Report
That isn’t what Minnesota’s Subsidy Accountability Law is proposing, though, when it says things like “[b]usinesses 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[.]”Report
I think building in penalties for certain things is okay. Business contracts do this all of time. The question is whether or not the lack of success was a result of uncontrollable forces or because the company didn’t live up to its promises. I could see this being an interesting sub-category of business law.Report
or have the girls buy the guys drinks.Report
Principled libertarianism would correctly tell us the answer is easy: governments should not have the authority to hand out economic development subsidies to businesses. That this post has been up all day and this fact is only now being pointed out by a liberal should tell you something about the prevalence of principle among libertarians.Report
How come you were the only liberal to do so, though? What does this suspicious silence on the behalf of all of the other liberals mean?Report
It means that with liberals, like libertarians, the issue has minimal resonance.Report
If you want an unprincipled libertarian to tell you that governments should not have the authority to hand out economic development subsidies to business, I can be your huckleberry. But being against corporate and business subsidies, against subsidies for pro sports stadiums, and all similar associated stuff like Kelo (and Atlantic Yards) is only the main thing libertarian think tanks like Cato, reason, and IJ have been working on for the past dozen or more years.Report
It’s why all of them raised such an outcry when a man whose personal fortune came from exactly that sort of subsidy was elected president.Report
Yes. Very nearly the only arguments you’ll see against corporate welfare are written by those who have to be paid to write them. Window dressing is easily purchased.Report
And none of the rules mentioned in Mr. Dwyer’s post prohibited businesses that received subsidies from discriminating based on sexual orientation. Why do you hate gay people, clawback?Report
I really don’t have the linguistic skills needed to express the full depth of my contempt for this kind of bullshit.Report
I just realized that that could be taken as referring either to clawback’s comment or to economic subsidies. It’s like posting two comments for the price of one.Report
Oh, and to clawback personally! A three-fer!Report
We don’t all check every post thoroughly. Frankly I thought the point was too obvious to mention.Report
I am not sure if any if any of the conversation up until this point included many/any libertarians, are you suggesting we can’t discuss a topic without reviewing what we think people who hold a different political viewpoint would say?Report
No, I just thought it striking that on a site with many libertarians a post about how to structure huge government subsidies for private entities elicited the sound of crickets. I’m pretty sure a similar post about how to structure huge government subsidies for the disadvantaged would draw more comments to the effect the subsidies shouldn’t exist at all. Yeah, I know it’s just one data point; of course it’s possible everyone just happened to be really really busy.Report
I think James and Kolohe already answered you quite well on that point.Report