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Sunday, September 7, 2014
State-Provided Targeted Benefits: Help or Harm?
By Tom Yamachika @ 5:01 AM :: 3657 Views :: Taxes

State-Provided Targeted Benefits: Help or Harm?

by Tom Yamachika, President, Hawaii Tax Foundation

State governments, including ours, are increasingly using targeted benefits, such as tax credits and exemptions, to attract companies or industries to their states. Research recently published by the Mercatus Center at George Mason University raises the question about whether these benefits help or hurt.

Take, for example, Wal-Mart which is one company particularly mentioned in the study. The study states that it has received at least 260 special benefits in the United States worth over $1.2 billion in total. Those subsidies help Wal-Mart, but hurt its competitors. The authors note evidence showing “while a Wal-Mart store generates an average of 100 jobs, 50 jobs also disappear as other retailers are outcompeted.” One paper cited in the study concludes that “Wal-Mart’s expansion from the late 1980s to the late 1990s explains about 40–50% of the net change in the number of small discount stores and 30–40% for all other discount stores.” In 1995, 79% of the 203 companies with gross revenues over $300 million were receiving some kind of tax break; companies such as Alcoa, Boeing, Nike, and Intel received benefit packages worth over $2 billion – each. Is this the kind of economy we want to encourage – where the already big get bigger and the not-so-big get eliminated?

Maybe you’re thinking that bidding for one particular large company might not be such a good idea but trying to attract a “strategic industry” would be better. Governments often subsidize industries that they see as “strategic,” although the category is unclear to begin with and shifts over time. Once, textiles were considered strategic, along with coal, steel, cars, defense, and construction; today, we tend to favor telecommunications, software, energy, and “green industries” such as alternative energy producers. The study takes North Carolina as an example. It wanted to build a “Data Center Corridor” and in 2007 granted Apple tax breaks worth $370 million over 30 years, and granted Google $255 million over 30 years. Apple’s facility was expected to hire fifty people, so its anticipated benefit pencils out to about $250,000 per job, per year. Was that industry truly strategic for that state? The study says that there are numerous examples of governments wasting money while trying to promote new industries. Will we do that too – namely, lose money on a strategic investment, such as high technology, and swear that we will make up for it on the volume?

The study also brings up another interesting point – governments aren’t naturally talented at picking the “right” or “strategic” companies, but get to think that they are after being heavily lobbied to do so. Indeed, a cottage industry of “location consultants” has sprung up, with some (presumably, the ones who are the best connected) demanding a commission of up to 30% of the subsidies and tax breaks they can negotiate. One California solar cell manufacturer, Solyndra, spent $1.9 million on lobbying efforts between 2008 and 2011 and succeeded in getting $528 million in federal loan guarantees as well as substantial investment from a California financing authority that made alternative energy investments on behalf of California taxpayers. Solyndra shut down in 2011, laying off almost all of its workers and leaving senior creditors, including the federal government, with nearly nothing…meaning that taxpayers like you and me picked up the tab for this debacle.

To paraphrase what the study concludes, history has proven that governments suck at targeting companies or industries, so they should get out of the market-distortion business and leave the targeting process to free market forces. Would that apply in Hawaii? It should give lawmakers something to think about.

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