Kansas City Uses Bad Research To Justify Corporate Welfare

A local development study didn't evaluate whether government incentives had anything to do with a business's decision to invest.

Applebee's spent the 1980s headquartered in Kansas City, Missouri, before moving right across the border to Lenexa, Kansas, in 1993. The casual restaurant chain moved its headquarters back to the Missouri side of the border in 2008, before leaving the region entirely for Glendale, California, in 2015.

Why all the jumping around? Essentially, local governments promised tens of millions of dollars in tax breaks and subsidies to try to convince Applebee's to move a few miles one way or another.

Some politicians and companies champion these so-called economic development incentives as a way to generate wealth and revitalization in struggling urban areas. However, interest groups that benefit from these subsidies often use dubious research methods to inflate the amount of economic growth attributed to these handouts. States and localities often end up competing with each other and offering larger and larger subsidy packages to woo particular companies. The most prominent recent example of this involves Amazon. 

For the past few years, there has been something of an economic border war going on between Kansas and Missouri. As NPR's Planet Money reported in 2016, each state has offered larger and larger tax breaks to companies, incentivizing them to relocate to its side of the appropriately named State Line Road in Kansas City. Since 2010, officials in Kansas and Missouri have spent $184 million and $151 million, respectively, just trying to get various companies to choose their state over the other one, with minimal long-term economic growth coming to either state.

However, a 2018 report from the Kansas City Council of Development Finance Agencies (CDFA) found that each dollar of development incentive, called tax increment financing, or TIF, generated $3.83 in new tax revenue. This finding stands in contrast with the majority of empirical research on TIF, which has found that these types of subsidies do not spur economic development.

There are reasons to question the CDFA study. As Patrick Tuohey, director of municipal policy at the Show-Me Institute, a free market think tank in Missouri, noted in a press conference, the CDFA is a trade group that represents the TIF industry, so asking it to review the effectiveness of these incentives "is analogous to asking the tobacco industry to study the impact of smoking." The Show-Me Institute conducted its own research and described the CDFA study as "fatally flawed from its inception and completely unresponsive to the City Council's directive" to evaluate the impact of such programs. 

In his criticism of the report, Tuohey detailed the numerous conflicts of interest surrounding the study. He also pointed out that the report simply takes the tax revenue a project created and then divides that by the size of the subsidy it received. As a result, the CDFA study does not consider whether the incentive actually had any impact on the original decision to go forward with the project.

For comparison, a study from the nonpartisan Upjohn Institute for Employment Research found that somewhere between 75 and 98 percent of firms that received economic development incentives would have made the same decisions anyway. For context, if only a quarter of the companies that received such incentives moved to Kansas City because of the incentives, then, using the information from the CDFA's study, the city would receive roughly 95 cents in new revenue for every dollar of subsidy spent—in other words, the city would lose money.

Some scholars have asserted economic development incentives hurt local economies by shifting economic resources away from productive industries and towards politically connected ones. Film tax credits are a common example of a particularly inefficient state-level subsidy, as they use tax revenue from existing business to attract and subsidize film production, which shifts money, workers, and other resources away from productive firms, thereby reducing productivity and economic growth.

It's not hard to understand why politicians refuse to give up these subsidies, as they allow them to take credit for new businesses and new jobs that the market would have created anyway.