We’ve registered our concerns previously about special deals for new business — especially those targeting the film industry. It’s been reported that some legislators are feeling a little queasy about offering business recruitment incentives — especially amid a $445 million revenue shortfall. But Gov. Pat has included in his proposed budget a push for renewed incentives for Hollywood types shooting their works in our state.
A couple of scholars from The Mercatus Center at Virginia’s George Mason University have published an intriguing paper raising serious questions about states competing against each other for economic development by dangling cash and other incentives at prospects:
[…] Targeted benefits often fail to achieve their stated goals and have major negative consequences
such as misallocation of resources, an increase in lobbying and other rent-seeking, an increase in
cronyism, and a bias toward large firms.[…]
When policymakers provide targeted benefits, they remove the profit and loss signals that investors
would otherwise use to determine the highest-valued uses of a particular resource. The lack of market signals also means that policymakers have no way of knowing the value of alternative uses of the resources being redirected as a result of their policies. The result is costly government investments that often fail to yield the benefits expected by policymakers. For example,
- A study of the Michigan Economic Growth Authority Tax Credit Program estimated the program’s cost per job to be approximately $45,000.
• A study of Minnesota’s Department of Employment and Economic Development estimated
that its Opportunity Building Zones cost approximately $29,900–$30,800 per job.
• Louisiana provided $1.7 billion in incentives to Cheniere Energy with the goal of creating an
additional 255 jobs and retaining another 77 jobs, costing the state nearly $7.5 million for
each job. […]
Companies end up expending resources on the political relationships necessary to secure future
gains in the form of targeted benefits. These are resources that would otherwise be used for wealth
creation. To affect policy, businesses create the impression that they are willing to relocate, and
signal to policymakers that they fulfill the criteria of a suitable benefit recipient.[…]
- Companies begin to habitually serve political interests instead of satisfying consumer needs, and political competition replaces market competition. Consequently, cronyism—the established practice of exchanging favors between powerful people in politics and business—may become entrenched in the social fabric of a state. […]
When targeted companies hire people and invest, they can create the illusion that the benefits they
receive increase a state’s well-being. Policymakers therefore have an incentive to make large-scale,
observable investments that appear to contribute more to a state’s economic development. This
creates a bias toward large firms when granting targeted benefits.
The authors’ full report on economic incentives can be found HERE.