Tuesday, July 12, 2011

Subsidy Cuts Could Reduce A Big Part of State Deficits

The Center on Budget and Policy Priorities estimated last month that state deficits around the country total $103 billion for fiscal year 2012 (http://www.cbpp.org/cms/?fa=view&id=711, h/t Dylan Matthews). Republican governors and legislatures have exploited these crises to slash Medicaid, education, and workers' rights. But there's another way: go after state subsidies to business.

Some of my best-known research has been to estimate the amount of subsidies to business given by state and local governments, going back to my 2000 book, Competing for Capital: Europe and North America in a Global Era (http://www.press.georgetown.edu/book/georgetown/competing-capital). In my new book (http://us.macmillan.com/investmentincentivesandtheglobalcompetitionforcapital), I update those estimates, showing that state and local governments give almost $50 billion in tax incentives and other subsidies to attract investment (what are generally called “investment incentives) and a total of $70 billion in all sorts of subsidies to business. Since data on local subsidies is much harder to obtain than that of state governments, unless I had better information for an individual state, in both books I estimated local subsidies to be the equivalent of state subsidies.

Thus about $35 billion per year is the state share of this total. Not all of these tax breaks are necessarily bad policy, but in most cases I've seen, they are enacted in order to compete with other states, and they largely offset each other without having much effect on the national distribution of investment. As economist Tim Bartik notes, for every dollar of new income that economic development spending generates in the state where it occurs, it reduces income in other states by about 79 cents (http://investinginkids.net/2011/05/03/is-competition-among-states-in-business-incentives-a-good-thing/). At the national level, then, there's not much bang for the buck, and Bartik's book (Investing in Kids) shows that even “well-designed” incentives that have a positive payback in the state where they're located have a negative effect nationally.

Let's say we reduce the $35 billion annual tab to $25-30 billion of “wasted” state incentives (though it would take more analysis to make an exact determination). That comes to just shy of 25-30% of state budget shortfalls nationwide. What does this mean in terms of jobs? According to the Economic Policy Institute's analysis of Bureau of Labor Statistics data (http://www.epi.org/page/-/IssueBrief306.pdf?nocdn=1), state government employment has fallen by just 60,000 jobs since June 2009, a pretty small number when you consider that $25 billion could create half a million jobs paying $50,000 per year in wages and benefits. The EPI reports that 407,000 jobs have been lost at the local level since June 2009, a much more significant figure but, again, one that could be more than fully offset by cutting $25 billion in local incentives. In other words, cutting state and local government subsidies could easily offset all the job cuts at those levels, and provide money for other programs as well.

Of course, this requires that subsidy reformers are able to hang on to the savings. In Michigan, Good Jobs First reports that just the opposite has happened (http://clawback.org/2011/06/17/michigan-slashes-corporate-subsidies-while-cutting-business-taxes-2/). While Governor Rick Snyder's budget has cut hundreds of millions in tax incentives, he more than made up for that by cutting business taxes by $1.8 billion annually, shifting the cost to less affluent taxpayers and people who depended on government programs. Tim Bartik adds that across-the-board business tax reductions are not cost-effective ways to create jobs and that Michigan's business tax cut is likely to be disappointing in its results (http://investinginkids.net/2011/05/23/michigan%E2%80%99s-recently-enacted-business-tax-cuts/).It would seem that eternal vigilance is just as much the cost of middle class economic security as it is of freedom.

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