“While corporate welfare has attracted critics from both the left and the right, there is no uniform definition. By TIME’s definition, it is this: any action by local, state or federal government that gives a corporation or an entire industry a benefit not offered to others. It can be an outright subsidy, a grant, real estate, a low-interest loan or a government service. It can also be a tax break — a credit, exemption, deferral or deduction, or a tax rate lower than the one others pay.” (Time Magazine, Nov. 9, 1998)
States and localities aggressively compete with each other to see which can put together the grandest package of benefits to induce companies to locate there. Or, as becoming increasingly common, a company threatens to move away from a city or state unless it receives incentives. Often these incentives are given in the form of industrial revenue bonds. IRB supporters are quick to remind citizens that the local government is merely helping the company to borrow the money — it is not giving the bond money to the company. Therefore, it doesn’t really cost the taxpayers to offer these IRBs.
In fact, issuing IRBs does cost local taxpayers. Here’s some information about IRBs in the City of Wichita. Quoting from the City of Wichita’s IRB Overview web page, located at http://www.wichitagov.org/Business/EconomicDevelopment/IRB/IRBOverview.htm:
“IRBâ€™s [sic] require a governmental entity to act as the ‘Issuer’ of the bonds, who will hold an ownership interest in the property for as long as the IRBs are outstanding. The Issuer leases the property to the business ‘Tenant’ on a triple-net basis for a term that matches the term of the IRBs, with lease payments which are sufficient to pay the principal and interest payments on the IRBs.”
In my analysis, it is the City of Wichita that owns the financed property for the duration of the bond lifetime. What if the business fails? It appears that the city owns the property then, and is responsible for paying the remainder of the bond balance. So, the taxpayers of the city assume credit risk.
Continuing from the same page: “The issuer can provide property tax abatement for up to ten years for property financed with IRBs.” The city, county, and state don’t receive property taxes from the business, yet they must provide services such as police and fire protection to the business. The cost of these services is born by the rest of the taxpayers.
Continuing further: “Generally, property and services acquired with the proceeds of IRBs are eligible for sales tax exemption.” Again, the government does not receive tax revenue it would otherwise have received, if not for the IRBs. The remainder of the taxpayers must make up the difference.
It appears, then, that issuing IRBs costs everyone but the firm that receives the benefits.
There are other issues with IRBs and other forms of corporate welfare, importantly involving the disruption of the free market allocation of resources. When governments instead of markets act to allocate resources, resources are allocated unproductively. These points come from “Ending Corporate Welfare As We Know It,” a Cato Institute Policy Analysis by by Stephen Moore and Dean Stansel, May 12, 1995, available at this url http://www.cato.org/pubs/pas/pa225.html:
1. Government is not good at picking winners and losers. “The function of private capital markets is to direct billions of dollars of capital to industries and firms that offer the highest potential rate of return. The capital markets, in effect, are in the business of selecting corporate winners and losers. The underlying premise of federal business subsidies is that the government can direct the limited pool of capital funds more effectively than can venture capitalists and private money managers. But decades of experience prove that government agencies have a much less successful track record than do private money managers of correctly selecting winners.”
2. Corporate welfare is very expensive considering the few benefits it produces. “Corporate welfare is supposed to offer a positive long-term economic return for taxpayers. But the evidence shows that government “investments” have a low or negative rate of return.”
3. Corporate welfare rewards those companies who look to government for help, rather than concentrating on satisfying market needs. “Business subsidies, which are often said to be justified because they correct distortions in the marketplace, create huge market distortions of their own. The major effect of corporate subsidies is to divert credit and capital to politically well-connected firms at the expense of their politically less influential competitors. Those subsidies are thus inherently unfair.”
4. “Corporate welfare fosters an incestuous relationship between business and government.”
5. Many corporate welfare programs increase the costs to consumers. Trade restrictions do this. Subsidy programs may reduce the cost to a small few at the cost of everyone else. Tax breaks increase the tax burden for those who don’t receive the breaks.
6. “The most efficient way to promote business in America is to reduce the overall cost and regulatory burden of government. Corporate welfare is predicated on the misguided notion that the best way to enhance business profitability in America is to do so one firm at a time. But a much more effective way to enhance the competitiveness and productivity of American industry is to create a level playing field, which minimizes government interference in the marketplace and substantially reduces tax rates and regulatory burdens.”
7. “Corporate welfare is anti-capitalist. Corporate welfare converts the American businessman from a capitalist into a lobbyist.” What a sad waste of time and effort — courting politicians instead of developing products and services the market wants.
I disagree with the Cato analysis on one point. The analysis states: “Nonetheless, we reject the notion that allowing a company to keep its earnings and pay less in taxes is somehow a ‘subsidy.’” I, however, contend that reducing a company’s taxes is the same as giving them money outright, as the impact on the bottom line is the same. I do agree with Cato that it is better if firms and individuals pay less taxes rather than more. But often corporate welfare measures like industrial revenue bonds are given to one company at the exclusion of its competitors. This, whether it is giving money to a company or reducing its taxes, is unfair to the company’s competitors. It is a distortion of the free market allocation of resources.
Supporters of corporate welfare claim that we in the United States must subsidize our corporations because other countries subsidize theirs. But the more corporate welfare we have, the more we have a socialized economy, and the more we become like European economies. This we do not want.
Other corporate welfare supporters claim that without incentives, businesses will not invest and create jobs. First, if taxpayers did not have to bear the cost of providing incentives, we would have more money to spend and invest ourselves as we see fit, not as politicians desire. Second, and most important, if a company does not believe in itself strongly enough to invest its own capital in itself, or if the capital markets have decided not to invest in a company, why should the taxpayers then have to invest in the company? It would seem like the taxpayers get to make only the most unproductive investments.
Finally, if we in Wichita or Kansas were to stop issuing IRBs and other forms of incentives, we would place ourselves at a disadvantage in competing with other states and cities. Therefore, I believe that the leadership to stop these types of corporate welfare incentives must start in Washington, so that it is ended nationwide. Then, localities can compete for jobs in meaningful ways.