Economic development subsidies rarely create positive economic outcomes

See An Interstate Compact to Phase Out Corporate Giveaways by Michael D. Farren of Mercatus. Excerpts:

"My testimony today has two main points:

1. Economic development subsidies generally fail to achieve their goals. That is,
   
   1. they generally don’t lead to broad improvements in economic outcomes for the states and cities that use them,
   2. they aren’t as important as many people believe in terms of swaying companies’ decisions of where to locate, and
   3. they can actually reduce economic development.
2. An interstate compact could provide a tailor-made solution to the counterproductive subsidy arms race confronting policymakers."

"Between 2011 and 2018 Kansas and Missouri paid a combined $335 million to subsidize the movement of around 12,000 jobs from one state to the other, with most companies moving only five to seven miles."

"few economic development programs actually provide cash payments, and even when they do, the subsidy is framed as something else. For example, most of Wisconsin’s recent subsidies for Foxconn Technology Group are characterized as corporate income tax credits. But because manufacturing firms are excluded from the state’s corporate income tax, the tax credits are equivalent to a cash handout.

Second, many economic development policies create fungible economic benefits that are, in effect, subsidies. For example, when a government provides a corporation with publicly owned assets, specialized infrastructure, loans, or loan guarantees it displaces some of the resources that the corporation would otherwise have had to spend on the project. Because of these factors, defining an economic development subsidy as any government-granted privilege that creates exclusive economic benefits for the recipients captures the broad universe of such policies."

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A large body of academic research finds that, while subsidies may benefit the firms, activities, industries, or regions that are privileged, most are not associated with measurable improvements in the broader communities that pay for them. Perhaps unsurprisingly, the peer-reviewed academic research on subsidies generally contradicts the favorable findings of private consultant studies. One important reason for the discrepancy is that the consultant studies rarely include the effect of economic harm done by the taxes that fund the subsidy. In essence, they use a “benefits only” approach, rather than a full-fledged cost-benefit analysis.

Furthermore, in the large majority of cases, economic development subsides don’t actually sway a company’s decision of where to locate, whether to expand, or whether to stay put. This may sound counterintuitive, but it has been documented in a large number of academic studies. Timothy Bartik, one of the leading scholars of economic development, surveyed the body of research on this question and concluded that the typical subsidy materially affects a company’s decision of where to locate or whether to expand in about 2 to 25 percent of cases. In other words, in over 75 percent of cases, a granted economic development subsidy was not the deciding factor in the company’s final decision."

 
"a subsidy can actually depress local economic development. One reason for this is that subsidies must be funded by taxes and taxes tend to discourage economic activity. Recent research suggests that state governments that provide more and larger subsidies tend to have higher taxes. It is difficult, however, to disentangle cause and effect. It may be that the cost of subsidies is passed onto state residents; or it may be that states with high tax burdens must make up for these burdens with more subsidies. Other research by Bartik—again summarizing the broader body of academic literature—finds that cities and states with higher tax rates tend to experience lower levels of economic activity. It is possible that the higher taxes needed to pay for the subsidies—which are ostensibly intended to spur economic development—may have a larger negative effect than the presumed positive effect of the subsidy.

"research by University of the South professor Jia Wang suggests that spending on public goods generally decreases after subsidies have been granted. Reducing the public services provided to residents would, in general, reduce the local quality of life, a factor known to affect firm location decisions."

"the subsidy itself also gives the company a measure of protection from its unsubsidized competition. This sheltered status allows the company to not work quite as hard to please customers as it otherwise would have, and it allows the company to be less vigilant in controlling costs. To put it plainly, subsidies protect companies from the consequences of laziness. Moreover, the very existence of the privilege encourages some firms to expend scarce resources seeking it and others to expend scarce resources opposing it."

"when a subsidy does change the company’s decision of where to locate or expand, then it is generally the case that the policy has persuaded the company to do something it shouldn’t have done. In short, the government has encouraged a particular investment decision and the use of scarce resources that would have been better used elsewhere or in different ways."