Frustrated by a corporate handout ‘Groundhog Day’? Blame the American Rescue Plan
Another wild year of corporate giveaways might have you feeling like Bill Murray in “Groundhog Day,” but it shouldn’t be a surprise. We hate to say it, but we told you so.
During the first months of the pandemic, as the economy crashed and tax revenues plummeted, policymakers begged Congress to bail out state and local governments. Our research recommended that coronavirus relief funding come with a ban on states’ use of taxpayer dollars to poach jobs from each other, which wastes roughly $100 billion every year. Otherwise, Congress could end up underwriting every competitor in an economic race to the bottom.
Since the passage of the American Rescue Plan (ARP), we’ve seen a surge in corporate handouts. The supersized deals that misuse taxpayer dollars are typically rushed through the approval process to limit transparency and prevent constructive discussion by wiser policymakers.
Let’s quickly review an (incomplete) list of recent giveaways:
There’s the combined $1.3 billion Ford Motor Company received from Tennessee and Kentucky and the $824 million General Motors got from Michigan. North Carolina – which gave out over $1.3 billion in 2021, including $846 million to Apple and $439 million to Toyota – just revealed another $228 million subsidy for Boom Supersonic.
So far the biggest spenders are Texas, which gave Samsung $1.2 billion; West Virginia, which gave Nucor Steel $1.7 billion; and Ohio, which just last week revealed during a Friday afternoon news dump that it wants to give Intel more than $2.1 billion.
We still don’t know how much Georgia promised Rivian, but one report indicates the number is “likely to be staggering.” Virginians are preparing to subsidize the Washington Football Team’s new stadium complex. Kansas policymakers are being pressured to approve nearly $2 billion for a mystery company.
For the reader who looks at this list and only sees booming American economic growth, let us offer some points to consider:
First, academic research shows that most subsidies don’t actually determine where a company locates or expands. Such decisions are based more on profitability fundamentals such as local workforces or access to suppliers and customers. It’s just financial common sense.
Consider that North Carolina’s $846 million subsidy is less than a single day’s revenue for Apple. Michigan’s $824 million subsidy is barely three days’ revenue for GM. Major corporations don’t make mission-critical site selection decisions based on the potential for an additional day or two’s worth of revenues spread over decades.
Second, on rare occasions when a subsidy does sway a company, it’s motivated a sub-optimal economic choice. Choosing a quick payout over the best place to do business means the company will do worse in the long term. That’s the opposite of what “economic development” is supposed to accomplish.
Third, because subsidies give companies advantages over their competition or come with strings attached, they lead to less focus on serving customers. Taken all together, the wasted resources and political distractions reduce national economic growth.
After Congress passed ARP, we advised the Treasury Department that it should explicitly restrict state and local governments from treating relief funding as a $350 billion slush fund. The economic arms race between the states was bad enough to begin with.
Thankfully, the Treasury agreed. In its Final Rule released last month, it forbade the use of ARP funding for general economic development purposes.
States probably think they can thumb their nose at the Treasury, because 20 have challenged ARP’s restriction on using relief funds for general tax cuts. Federalists have a good argument that this attempt to commandeer state tax policy is an overreach of congressional power. But its application to economic development subsidies should be considered a separate issue and upheld by the courts. States’ attempts to sway corporate relocation and expansion decisions intrinsically affect interstate commerce, the regulation of which was constitutionally delegated to Congress.
Because Congress seems uninterested in solving the arms race, some state leaders are taking matters into their own hands. Under the Constitution’s Compacts Clause, they’re developing an interstate compact that would allow states to credibly commit to ending all subsidy programs simultaneously. If Congress wants to help, it could provide preemptive consent.
Meanwhile, legislators in New York, Illinois and Florida are considering bills that would ban the use of nondisclosure agreements that keep taxpayers – and even elected officials – from knowing key details about subsidy deals before they’re approved.
Just about every day brings news of another subsidy that will reduce, rather than improve, future economic growth. It’s a figurative Sisyphean hell not unlike the one in the iconic movie that’s become synonymous with Feb. 2. Our escape, like that of Bill Murray’s character, will require abandoning self-destructive selfishness and embracing cooperation.
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