Subsidies

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.

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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.

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  1. …somewhere between 75 and 98 percent of firms that received economic development incentives would have made the same decisions anyway.

    Apparently Muresianu doesn’t feel people should get icing on their cake, a cherry on top, or a third synonym for embellishments.

  2. Once more, with feeling: Letting businesses keep more of their own money is not a subsidy.

    I don’t grieve when a jurisdiction foregoes a dollar of tax and gets only 95 cents in “return”. As far as I’m concerned, we need more of these bidding wars, not fewer.

    1. So how do you feel about enticements that go beyond tax cuts? Municipal-funded infrastructure? Special deals on utilities? Stadiums?

      1. Like anything in business the costs and benefits should evaluated on a case by case basis

        Generally the argument is that attracting a business to your town produces jobs (both primary and secondary) However in the case of the Applebees headquarters jumping between KS and MO it doesn’t seem to make a difference; Any jobs produced on the KS side of the border are just as available MO residents, and vice versa. The move to CA might have been more justified in whatever that town offered them

    2. I agree that letting businesses keep more of their own money is a good thing. But this is “selective reimbursement.” The government decides who gets to keep “more” of their money; other businesses get screwed. In other words: cronyism.

      1. Yup. And this is the problem.

        I am all for broad based incentives that apply to everybody… Say an entire state decides any company that is new in a state gets a 50% reduction in taxes for 5 years. That I would have no problem with.

        But a law that says any company that is new to the state, employs between 250-500 people, produces pink polka dotted widgets, and has a CEO named Bob gets 50% off… Fuck that. Many states write laws that theoretically COULD apply to anybody, but they’re written so specifically that only one (or a couple) firms can actually meet the criteria.

        Things need to be broad based, otherwise it is cronyism.

  3. Look, once somebody from the Progressive clown car gets elected benevolent dictator and gender overlord (overlady?) (over-can’t-tell-the-difference?) companies will simply be told where to locate.

  4. The problem with this stuff is this:

    In a vacuum this stuff works. You slash stuff, it DOES bring more jobs and activity to your area… The problem is when EVERYBODY is doing it it no longer does that, but still has the costs.

    So it’s kind of a nuclear disarmament scenario. Everybody SHOULD stop doing this crap, and just compete on their normal tax rates and regulations… But until everybody stops doing it, you’re a fool to stop doing it.

    A staged deescalation like we started doing with Russia is perhaps the best way to go about it. States/cities start tapering down, which allows others to do the same, and eventually nobody does shit.

    1. Yep. But sometimes it fails utterly. The smallish city I lived in in CA invested several million dollars in developing a “business park,” complete with roads, utilities, etc., back in the early 1980’s. There is exactly one (one) small business there today, and it relocated from …. elsewhere in the city. The jackrabbits like it, though 🙂

      1. It surely can. That’s why the government shouldn’t be developing anything. Tax cuts, reduced regulations? Sure. Those are paper costs, but don’t actually cost anything. They definitely should NOT be out building buildings and shit. That should always be private developers. Maybe they should have changed the zoning to allow it if it didn’t previously, but not building it directly.

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