State Incentives for Economic Development — Corporate Welfare? The Debate We Haven’t Had — Any Federal or International Legal Issues? Maybe.

business manager handshake isolated with hundred dollar money
The New York Times recently published a series of front-page articles on state and local incentives and economic development. This series was the culmination of  a 10-month investigation into economic incentives awarded by hundreds of cities, counties, and states.
Perhaps the most invaluable contribution of the series is its extensive interactive databases about the companies, states, and sectors involved, including per capita expenditures, percentage of state budgets going to incentives, and an extensive listing of the types of incentives (tax refunds, loan guarantees, tax credits, and more).
Article # 1 — Companies Seek Tax Deals.” New York Times (December 2, 2012).
Article # 2 — Texas and Industry Bonanza.New York Times (December 3, 2012).
The New York Times investigated several recent high-profile cases from Michigan to Texas. It concluded  that there is a significant  degree of cronyism involved in awarding these incentives, and they  place a large drain on state and local budgets, often without much to show for themselves.
The articles highlight the  lack of a national debate on this widely used approach to economic development during the ongoing economic crisis.
While focusing on the political and business aspects of incentives and not as much on economic theory or historical cases, this series emphasizes one  topic that has been argued  over through the years: Whether these incentives represent  “beggar-thy-neighbor” policies, corporate welfare and if  they come at the expense of other priorities, including improving workforce training and developing better employment conditions, such as wages and benefits.
The New York Times series  contend that long-term benefits may be at least as likely to come from investing in public universities and infrastructure projects as from supporting corporate relocations. That large corporations have the ability to lobby for declining tax dollars and then follow the best incentive offers where they may appear.
There is a broad range of state and local incentives, including among others: corporate income tax credit, state tax refunds, various tax exemptions (for example, local personal property and property taxes), cash grants, loans and loan guarantees.
To me state incentives need to be carefully assessed in terms on competing economic interests,  expected outcomes, and measurable metrics.
One needs to delineate between state support of domestic corporate relocations and foreign ones. One needs also to consider state support of export promotion, especially of small and mid-size firms, as distinct from corporate relocation.
Unfortunately, in 2006, the Supreme Court declined an opportunity to rule on the use of state incentives for economic development under the interstate and foreign commerce clause. This, however, really is a major issue of federalism that needs to be decided by the courts.
The extensive interactive data sets  in the New York Times series can let policy makers assess and compare the impact of economic and fiscal incentives on state budgets, taxes, and corporate policies, including relocation and expansion. For example, they make clear the relation of incentives to actual job creation.
It should be emphasized that this debate is particularly important when comparing the value of incentives for corporate relocation within the United States against that of recruiting new foreign direct investment into the United States (“Greenfield investments”).
Is there a more valid reason to offer economic incentives to foreign companies not located here than to firms already located in the United States? Is it preferable to fund export promotion rather than domestic corporate relocation and thus avoid the beggar-thy-neighbor dilemma? 
By the way,  the World Trade Organization (WTO) recently ruled that state and local incentives given to Boeing in the state of Washington are illegal subsidies that violate U.S. global trade obligations.
I look forward to more rigorous assessments of state incentives and economic development in our rapidly globalizing and hyper-competitive world. Taxpayers and society deserve closer government and public scrutiny of these state programs in order to support more sustainable economic development.
From my personal observation, as a board member of the Virginia Economic Development partnership, the range of incentives available in Virginia, at both the state and local levels, are an essential element of economic development. This along with a favorable regulatory business environment constantly drives Virginia to be ranked as one of the most business friendly states in the United States. One that leads in job creation.
Virginia state incentives are definitely free of the political cronyism that The New York Times reported on in Texas.
Proper procedures, continuing oversight, specific performance metrics, and constant evaluation are essential to successful state actions in awarding and monitoring  a broad range of state incentives aimed at economic development and job creation.
Earlier post discussing similar issue ………….. Malawer, “State Incentives and Global Trade.” (January 9, 2012).

About Stuart Malawer

Distinguished Service Professor of Law & International Trade at George Mason University (Schar School of Public Policy).
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1 Response to State Incentives for Economic Development — Corporate Welfare? The Debate We Haven’t Had — Any Federal or International Legal Issues? Maybe.

  1. asalesrep says:

    You make a good point, however, are great sellers born or made?

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