Commentary: States Race to the Bottom in Economic Development Subsidies

In January, West Virginia’s governor called a special session of the legislature to rush through an incentive package intended to lure an unnamed company to the state. Later, it was identified that the company was Nucor Steel. With the promise of $2.7 billion in private investment and 800 new jobs, the state agreed to fork over $1.35 billion in taxpayer funding to their new corporate citizen. This translated into almost $1.7 million per job created, at a time when unfilled job openings are at their highest level ever.

As is customary in such cases of wooing private enterprise, West Virginia’s civic leaders justified the investment by pointing to the temporary construction jobs and so-called “ancillary” jobs also being created and the increased taxes that West Virginia would collect over the coming decades. Notwithstanding the fact that those taxes would be a mere fraction of the money West Virginia would spend to bring Nucor to the Mountain State, the incentive package sailed through the legislature. It was signed by Gov. Jim Justice in January.

The legacy of the West Virginia/Nucor deal won’t be the 800 jobs created. It will be that we’ve reached a new low-water mark in the competition between states to dole out billions in corporate welfare. This race to the bottom in economic incentives mainly serves politicians looking for headlines, lobbyists looking for paychecks, and companies looking to fleece taxpayers. They are the by-product of a combination of unwarranted optimism, cronyism, and incompetence. As 89% of stocks are owned by the top 10% of American wealth-holders, these incentives also have the consequence of increasing wealth inequality.

Not more than a month after West Virginia’s blunder, my home state of Kansas decided to follow suit. Pulling a page out of the West Virginia playbook, the administration of Gov. Laura Kelly advanced legislation that would pay a mystery company over $1 billion in taxpayer money in exchange for locating in our state.

In advocating for this corporate welfare package, the Kelly administration is not only following West Virginia’s math-challenged lead, but also continuing the practice of previous Topeka administrations in experimenting with faulty economic plans. Instead of tax cuts as the recipe for prosperity, the Kelly administration is choosing tax credits and government subsidies as its primary ingredients. Unlike West Virginia, however, the legislature didn’t simply rubber stamp the Kelly proposal. The Kansas legislature ultimately whittled away at the incentive package to ensure it doesn’t bankrupt the state.

The initial package proposed by the Kelly administration would have led to the state squandering its current multi-billion-dollar surplus, requiring the next administration to almost fully deplete a proposed rainy day fund. The numbers are telling. Our mystery company is reportedly going to invest $4 billion and create 4,000 jobs in Kansas. Before you get excited about either number, consider the following: The $4 billion investment is private property.

The only benefit to the state of that $4 billion is the taxes that it can collect on the property. The initial plan was for the state of Kansas to pay the mystery company $600 million over three years in the form of a 15% refundable tax credit. The administration also proposed cutting its property taxes in half, forever. So, based on current property tax rates, Kansas would collect roughly $14 million a year on their $600 million investment. This meager 2.3% return is far less than the state is currently paying to borrow money.

And what about the 4,000 jobs paying an average salary of $50,000 annually Notwithstanding the fact that these wages are below average in Kansas, the state would take decades to earn back the 10% subsidy Kansans are supposed to pay Mysterio Co. for the first 10 years. Assuming wages grow 3% annually, and using a 4% borrowing rate for the state, it would take until 2060 to recover the excess subsidies paid in the first 10 years. That, of course, assumes this company is still in business at the Kansas location in 38 years.

Compared to what Virginia and New York offered Amazon for its second headquarters, the Kansas corporate welfare plan is exceedingly generous. The two East Coast states promised $2.2 billion in incentives for 50,000 jobs at an average wage of $150,000. Their incentive package cost just under 30% of the first year’s wages. The cost of the Kelly plan: a whopping 412% of first year wages, 14 times the combined New York and Virginia proposal. New York’s proposal was considered so profligate that it prompted protests and defections from local Democrats, and Amazon eventually withdrew from consideration.

Like Jim Justice, the Kelly administration has argued that there are ancillary benefits to this massive giveaway. Demand for housing will supposedly rise, they say. In a state with a housing deficit, it’s unclear who benefits from this increased demand, and it’s certainly not Kansans currently trying to buy a home at inflated prices, or homeowners who will see their local property taxes soar. Other jobs will be created by vendors to Mysterio Co. Those vendors, however, will be entitled to incentives of their own.

And then there’s the multiplier effect—the idea that a dollar of government spending circulates through the economy creating sufficient economic growth to more than offset the cost of the spending. We heard that same argument by our former governor, Sam Brownback, in support of his tax cuts, which nearly bankrupted the state. Whether or not you agree with the economic rationale, any Keynesian would suggest that you don’t increase government stimulus in an over-heated economy because it leads to inflation. Kansans who have filled their gas tanks recently know the stakes involved here.

You might ask, “Why focus so much attention on the Kelly plan given the changes made by Kansas’ legislature?” The answer lies in a provision of the legislation that allows the executive branch to sweeten the incentive package after the fact with the approval of the State Finance Council. Given the clear intentions represented in the initial legislation, the council will, no doubt, be tempted to revert to many of the provisions in the original bill. Delaying the tax credits from three years to 10, eliminating the property tax break, and reducing the employment subsidy from 10% to 7.5% were the primary changes the legislature made to protect the budget. Any meaningful change to any of those provisions will likely put the Kelly budget forecasts back into the red.

As the State Finance Council considers potential changes, its members might ask themselves a simple question: Does it serve the interests of the almost 1.5 million Kansas workers to break the bank for 4,000 jobs, particularly at a time when we have more job openings than unemployed workers? The question should answer itself.

Warren Buffet once said, “The thrill of the chase often masks the reality of the catch.” Unfortunately, the reality of these corporate welfare plans in places like West Virginia and Kansas is that the taxpayers are going to be left holding the bag for decades to come.