Corporate subsidies ignite a race to the bottom

by Brian Leubitz

It is not often that I read something on the FlashReport that I can agree with in the general substance. But, while the article was intended to be a slap at Jerry Brown, the Reason Foundation’s (a right-wing libertarian group) Adrian Moore, PhD, takes on corporate subsidies.

Proponents argue that while cases such as Solyndra are unfortunate, they are a necessary evil that must be tolerated since the benefits of governmental “investing” in certain technologies or industries will, in their view, someday outweigh the costs. I’d point out that the government rarely knows what is both certainly beneficial and inadequately funded by the market, but even worse is a lousy investor, giving to well connected companies, not those with the best business plan, and not caring if the investments pay off or not, only the newsbite when the check is written.

The Reason/Howard Jarvis study looks at specific corporation tax and sales and use tax credits, deductions and exemptions in order to evaluate whether they serve their purpose. The argument offered in support of such tax breaks is that they will improve the lives or livelihoods of certain classes of individuals, businesses or industries. But their costs are frequently ignored. While they may encourage business activity in a certain sector of the economy, this comes at an unseen cost, which is the business activity that would otherwise have taken place in other sectors of the economy. (FR)

These all fairly reasonable points here. Perhaps California does spend too much on corporate subsidies to lure jobs. Perhaps we should be asking ourselves whether the government should be subsidizing corporations at all.

But this should be part of a larger conversation that we should be having at every level of government. The most visible examples of these subsidies come in the context of sports, where teams are lured with free land, tax credits, and sometimes a brand new stadium with a pretty bow on top. But it isn’t just sports where we see this. In a great series in the New York Times, Louise Story investigates the troubling growth in tax subsidies that are going to specific corporations, and how an entire cottage industry has grown up to game the system. (She also gave a very interesting interview to Terry Gross on NPR’s Fresh Air.)

The fact of the matter is that yes, California does spend a fair chunk of change on corporate subsidies. The Times quotes a figure of $4.17 billion, or $112 per Californian. But if you look to the right, you’ll see that our $112 per capita pails in comparison to other states. Especially some very heavily Republican states. Alaska spends nearly a thousand dollars per person! And Rick Perry has spurred the people of Texas to spend over $750 per person. This turns out to be real money:

The math on the new deal angers former Amazon workers, especially those who are still unemployed. For Texas to give up more than $250 million in tax revenues in exchange for 2,500 jobs amounts to about $100,000 per job. Most distribution workers are paid $20,000 to $30,000 a year. The rest benefits the company’s bottom line, which generally increases executive bonuses and shareholder returns.(NYT)

This is the new math of corporate subsidies and job creation. And, unfortunately, California carries a special burden in this area. Film subsidies have been some of the hottest growth areas, garnering a full story in the Times. States and cities find it attractive to get a movie shot in their area, and so spread the cash around. Michigan, Louisiana, and pretty much every other state have tried to lure Hollywood away from, well, Hollywood. (Canada has also been aggressive in this area as well.)

The article is on FlashReport, so of course, it is rather unnecessarily partisan. It calls out Gov. Brown, and name checks Solyndra, and the film tax credit. Solyndra, of course, being the big cause celebre of conservatives for collapsing under the weight of cheap solar panels being dumped on US shores after having received federal loan guarantees. And this being California, conservatives like Dr. Moore get to blame the evil liberals in the legislature for all these ills.

But Dr. Moore is probably right that we shouldn’t be spending so heavily providing cash to corporations. He and I clearly disagree about what should come of that money, lowering the corporate tax rate would fall significantly behind investing in education and other priorities, but that’s a topic for another time. Unfortunately, we live in a competitive world, and our governments are competitive as well. In many ways, it is something of a mutual self-injury pact. Local governments compete against one another, and the individual citizen gets lost in the shuffle.

Clearly, we, as a nation, need to do a better job of monitoring this process. And we need to have a conversation about whether it is in our best interest for states and municipalities to compete in this manner. Dr. Moore (and the NYT’s Louise Story) do us a favor by raising this issue. It deserves serious consideration, perhaps with a touch less of the absurdly misplaced partisan rancor, about how we government goes about the task of “job creation.”