Beware of Corporations Teaming Up With State Governments

Posted: May 18, 2014 11:25 AM
$8.7 billion for Boeing. $420 million for Hollywood. $659 million for IBM.

State-level politicians like to stand in front of large corporations and declare how welcoming their state is for business, and tout jobs gains for their state. What you don't see, behind the scenes, is that politicians are often luring businesses with sweetheart deals that hurt the economy on the whole and often subsidize failing businesses.

Christopher Coyne of the Mercatus Center at George Mason University explains:

With over half a billion dollars grossed worldwide, "The Amazing Spider-Man 2" is one of the summer's biggest blockbusters. It's also the largest film production ever made in New York, and as a result, the largest beneficiary of its tax breaks for movie makers. Every year, New York gives roughly $420 million in tax breaks to the film industry alone. Louisiana comes second at $236 million.

Yet these colossal corporate benefits pale in comparison to other benefits that state and local governments grant to big businesses. Boeing recently announced that it will build the wings for its 777X jet in Washington state after it offered the aircraft maker the largest benefits package in U.S. history, worth $8.7 billion. Overall, state governments annually dole out tens of billions of dollars tax breaks, subsidies and other benefits to attract companies, often engaging in bidding wars with other states. This game doesn't just hurt the losing states; the winners suffer, too.

Targeted benefits encourage companies to game the system. In 1993, IBM caused a rapid increase in local unemployment by laying off 7,000 people in upstate New York. Seven years later, the government declared IBM's location an enterprise zone, a label bestowed upon high-unemployment areas in need of revitalization. Combined with additional subsidies, this earned IBM $659 million in benefits. By arguing that they are important for the state economy, large companies in particular can receive benefits to invest more or expand their workforce.

When nothing bad happens, it seems like there is upside: businesses get a lower tax burden and perhaps a few more people get jobs. But look at that sweetheart IBM deal: they were shedding jobs like crazy and were still rewarded by the state government of New York. It's better to think of these deals as mini-Solyndras: there's a lot of downside risk.

Think of Curt Schilling's video game enterprise 38 Studios. They got a sweetheart deal from the state of Rhode Island - and folded a few months later, while Rhode Island taxpayers were out over $100 million to the company.

Conservatives are good at fighting for broad-based changes that affect every company in the market equally. It's important to remember that specific, targeted, sweetheart deals for companies are universally a bad idea.