Why business subsidies get broad bipartisan support

Why business subsidies get broad bipartisan support
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Few lawmakers are able to say no when business leaders come to state capitols looking for a handout. It doesn’t matter whether the governors or the legislatures are Democratic or Republican, there’s a bipartisan consensus. We crunched the numbers for the business subsidies authorized in the state of Michigan, and the exercise has some lessons for other states.

In our research at the Mackinac Center, we have tracked every legislative vote and amendment and a record of how each lawmaker voted since 2001. Of business subsidy laws enacted by the state of Michigan, we found 73 that authorized the transfer of $16 billion from state taxpayers to businesses selected by state officials. In order to see which lawmakers liked subsidies the most, we excluded a handful of laws that bundled handouts with other policy changes, making the votes too complicated to demonstrate a lawmaker’s desire for more subsidies. We then used the votes to build a scorecard for nearly 500 legislators that served in this period.

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The results varied greatly. One lawmaker, a Republican, approved all $5.4 billion in subsidies that were approved during his tenure, while 22 lawmakers opposed every business subsidy bill that was approved. Only one of the 22 was a Democrat.

 

The overwhelming majority of lawmakers voted for at least some subsidies, with 43 percent of all lawmakers voting for every dollar of subsidies that came their way. Though voting for subsidies was a bipartisan activity, there were some differences between parties. Of Republicans, 36 percent supported all business subsidies, but 52 percent of Democrats did the same. The average Democrat approved $1.62 billion in subsidies while the average Republican approved $1.47 billion worth.

Michigan lost hundreds of thousands of jobs during the Granholm administration, which ran from 2003 to 2011. We suffered through a one-state recession for much of it. The response to this deep and broad recession was not to improve the policy environment for everyone, but rather to target industries and businesses selected by politicians.

And it seemed that this was the only thing that Republicans and Democrats could agree about. The governor was a Democrat, but Republicans controlled the state Senate all eight years of her tenure, and they controlled the state House four of those years. Together, Republicans and Democrats approved $12.6 billion in handouts — an amount that could have been used to pay off the state’s debts.

Granholm was succeeded by Republican Gov. Rick Snyder, who has only served with Republican majorities in both chambers. His time in office, which will end come January, has seen fewer subsidies. One reason may be that Snyder initially called these programs “the heroin drip of state government.” But he never went cold turkey on the subsidies, and he subsequently drove through $2.5 billion in new business subsidy authorizations on his watch.

While bipartisan majorities still approve subsidies, there has also been a recent round of bipartisan opposition. The 22 lawmakers that opposed all subsidies have only served since 2009, and two more Democrats have joined in opposing most of the bills.

There’s certainly reason for bipartisan opposition. Free-market Republicans ought to reject crony capitalist deals. Progressive Democrats should push back on handouts to millionaires and billionaires.

The academic literature on subsidies is decidedly negative. That is, they don’t plant industries or grow jobs or even justify their costs. At best, they produce a small temporary blip. At worst, taking money from all taxpayers to deliver it to select companies costs jobs. Thus, these subsidies are economic development programs that don’t develop the economy.

Legislators face a dilemma over these subsidies. Making broad improvements to a state’s business climate encourages real growth, but it’s hard to claim credit from it. Selective business subsidies, on the other hand, allow them to show up at ribbon-cutting and groundbreaking ceremonies, even if those don’t actually develop the economy. Legislators, meanwhile, must respond to threats from companies that say they won’t locate in their state without a subsidy. They also know that other states won’t be as reluctant to open their purses.

There’s yet one more reason why politicians tend to favor business subsidies, even when they don’t justify their costs: Business leaders have higher status among politicians of both parties than general taxpayers. And that’s a shame.

James Hohman is a fiscal policy analyst at the nonprofit Mackinac Center for Public Policy, a Midland, Michigan-based group aimed at promoting limited government.