The subsidy bonanza sunk costs

  • Article by: ARTHUR ROLNICK and MIKE MEYERS
  • Updated: February 2, 2013 - 8:39 PM

A 'Capitalism Cleansing Act' could end corporate welfare as we know it. Here's the problem, and the plan.

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What kind of tax fills pockets by threatening to empty them?

The answer to the riddle holds the secret to saving billions in public money now grabbed for private gain.

For decades, too many governors and mayors have been captivated by calls for cash from builders of shopping malls, hotels, parking ramps, apartments, condos and office parks. The public takes much of the risk; private owners gather all of the reward.

Gov. Mark Dayton repeats this pattern in his new budget proposal. He recommends spending $30 million to attract and retain growing companies, another $25 million for businesses expanding or relocating in Minnesota and $10 million for private developers building housing in fast-growing regions.

The promise: to bolster 15,000 jobs.

The reality: No one ever knows how many jobs incentives create or how long they'll last.

But across the nation the tab has grown enormous. Tens of billions a year in public dollars are squandered on such deals.

A new federal tax could end the folly. It would be a tariff so menacing and confiscatory that it never would be collected. The tax would be peculiar, in that it could please citizens of every stripe -- liberal, conservative or at sea in the center.

Call it "The Capitalism Cleansing Act of 2013."

Before exploring this novel way to scratch corporations off the public dole, first ponder the size of the problem.

A recent investigation by the New York Times estimated that the nation spends at least $80 billion a year on subsidies for the few at the expense of the many.

Such "economic development" deals are rarely economical and disappoint as development.

And the Times almost certainly underestimates the cost.

Consider Minnesota's record on subsidies. The Times estimates that the subsidies within Minnesota's borders -- state and local -- come to $239 million a year. That's about $45 per person annually, or about a penny for every dollar of the state budget.

In contrast, Michigan, Wisconsin, Pennsylvania and many other states ladle out far more to the outreached hands of corporate decisionmakers. As a share of the state budget, Michigan business subsidies amount to 30 times as much as Minnesota's, by the Times' estimate. Wisconsin spent 10 times as much; Pennsylvania, 18 times more.

Texas takes the trophy as biggest corporate benefactor in the nation. Texas annually disburses 51 times as much in corporate welfare, in relation to all state spending, as does Minnesota.

By that standard, Minnesota comes off as a virtual noncombatant in the "war among the states," in which subsidies become weapons to lure companies from one region to another. The arsenal includes property tax breaks, reduced income taxes, direct grants and other means, overt and covert, to underwrite businesses at public expense.

If subsidies create jobs, Minnesota must be a major loser. Right? Wrong.

In December, Minnesota's unemployment rate stood at 5.5 percent -- lower than in Michigan (8.9 percent), Wisconsin (6.6 percent), Pennsylvania (7.9 percent), Texas (6.1 percent) and the nation as a whole (7.8 percent).

Texas offered tens of millions in subsidies to the likes of Texas Instruments, Dow Chemical and Samsung -- deals that robbed local school districts of sorely needed tax revenue, the Times reported.

Even as the auto industry cut jobs, Michigan tried -- in vain -- to lure Hollywood riches to the state by becoming "the capital of film tax credits." The job growth strategy has fizzled, the Times reported.

It's a familiar story, with a long, sad history in Minnesota.

City Center, built in the 1970s in downtown Minneapolis, was a costly flop, underwritten by tens of millions in public dollars. Gaviidae Common, another misfire. The all-but-abandoned Block E entertainment center was the latest grim failure.

St. Paul, meanwhile, has a skyline dotted with "jobs" schemes that came to tears -- from Lawson Software to Galtier Plaza. The Amhoist Tower, built in the 1980s, for a time was a large, brightly lit marquee on the skyline for a company that fled town despite generous government aid.

Meanwhile, Minnesota spent hundreds of millions catering to the financial demands of Northwest Airlines, an employer that pared jobs across the state by the thousands after a merger with Delta.

Consider the Times' example of the largest corporate subsidy in Minnesota -- nearly $60 million to Best Buy, which built a sprawling headquarters in Richfield. The aim was to accommodate thousands more employees in the years to come. Instead, Best Buy has been shedding workers and the retailer's future remains in doubt.

Despite all these stumbles, Minnesota manages to outperform the nation in job growth.

Clearly, job creation is the result of something other than throwing public money at private companies. Study after study has shown the education of Minnesota's workforce has been the key to the growth of high-quality jobs for the last half-century.

It's a lesson lost on many elected officials. They instead search for ways to hold the line on secondary and college education expenses while tossing cash out the window to attract businesses. Subsidy deals leave governments with ever less to prepare the workers of tomorrow.

It gets worse. The Times misses some of the largest examples of subsidy waste. In the last few years, state and local taxpayers in Minnesota have watched helplessly as close to a billion in public money has been diverted to sports stadiums. The Minnesota Twins and the Minnesota Vikings have joined the list of government dependents, along with the Timberwolves and the Wild.

Such subsidies, part of a national pattern of taxpayers subsidizing some of the richest people in America -- team owners -- went unnoticed in the Times database. It focused on ongoing giveaways, like Minnesota's JOBZ program. Yet stadium deals also are the gifts that keep on giving, obligating public treasuries to earmark money for construction bills for decades.

So what does the Times study demonstrate? That state and local governments are chasing industries that don't make their primary location decisions based on subsidies. Yet corporate executives are delighted to accept public checks whenever they're offered.

The obvious conclusion is that the biggest spending states are wasting billions to "create jobs." The programs rarely yield jobs that wouldn't have been created anyway.

When subsidies do drive investment decisions, the deals often go sour.

That makes sense. After all, if demand requires a company to hire workers, it will -- with or without government aid. If prospects are shaky, however, who better to bear the risk than the public, rather than private investors?

The practice, furthermore, is remarkably unfair. Would anyone invest in a privately financed hotel or parking garage if a publicly subsidized competitor is down the street? Nobody knows how many bets never are made -- and jobs not created -- when governments tilt in favor of one business over another.

The solution is at hand, if only Congress will act.

Impose a 100 percent tax on any and all state and local business "incentives." An excise tax gets around constitutional limits on the federal government in matters within state borders. The existence of the tax would destroy the appeal of subsidies.

Who would want to give away -- or accept -- a state or local subsidy if the federal government was ready to grab every penny in a tax? The mere existence of the new federal tax would ensure it never would be collected.

Winning votes in Washington will be a challenge, however.

The Minneapolis Federal Reserve Bank years ago unveiled the concept in a detailed article. The idea was picked up by former Rep. David Minge, D-Minn., who in 1999 introduced a measure to impose a federal anti-subsidy tax. It never emerged from committee.

Still, from time to time, Congress has circled back to take measure of the problem -- and the proposed solution. The Senate held a hearing in 2007, but to no effect.

In the years that followed, state and local governments have shoveled hundreds of billions in public money into private hands.

With state and local budgets more strained than they've been in decades, the time to dawdle has ended.

Members of Minnesota's congressional delegation should take the lead in promoting creation of a federal "subsidy tax."

Minnesota has $239 million a year -- or more -- to save if the futile job-chasing marathon ends.

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Arthur Rolnick is a senior fellow at the Humphrey School of Public Affairs, University of Minnesota, and was previously senior vice president and director of research at the Federal Reserve Bank of Minneapolis. Mike Meyers, a former Star Tribune business reporter, is a Minneapolis-based writer.

  • A FEW LOCAL EXAMPLES


    •Best Buy headquarters, Richfield.


    •The Vikings stadium, Minneapolis.


    •Northwest Airlines.


    •Lawson Software, downtown St. Paul.


    •The Twins stadium, Minneapolis.


    •Block E, downtown Minneapolis

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