In 2003, Texas Gov. Rick Perry, signed into law something he later trumpeted as one of his grandest achievements: the creation of the Texas Enterprise Fund. The largest of its kind in the nation, this “deal-closing” fund was designed as a tool for state government to provide an enticement to a company looking at Texas as a place in which to relocate or expand. The goal was to use the fund as a final option when Texas competed against other states providing similar viable relocation options for a company. By Sept. 30, 2018, the TEF had awarded about $609 million in grants to 163 different companies. The governor’s office claimed this spending created 94,000 jobs and over $27 billion in investment, an absurd 44-fold return on investment.
Looking at the Enterprise Fund’s records, it is hard to argue that many of the companies that received deal-closing grants would not have chosen Texas as a place to locate even in the absence of the grants. For instance, how likely is it that CITGO Petroleum would not have expanded their refinery facility in Texas without the $5 million TEF grant they received? Oil and Texas are indelibly linked in the public’s imagination for a good reason. Is it really necessary to subsidize a company that likely had few other realistic options for states in which to locate their operations? Nor is it easy to justify the amounts expended for the ability of politicians to declare a victory in the quest for job creation.
The TEF can only claim victory for a miniscule portion of the job creation that occurs in Texas, nearly all of which requires no taxpayer-funded subsidies. Indeed, for 2016 and 2017, the TEF provided taxpayer money to projects that pledged to create a total of 13,041 jobs. Over the same period, the state economy lost 4,392,000 jobs and created 4,736,000 jobs. Even if all companies receiving TEF support created all of the jobs they promised to, the TEF would be responsible for less than half of 1 percent of Texas’ job creation over the period.
Texas is not alone. The 16 companies in Michigan that received deals from the Michigan Business Development Program pledged to create 1,120 jobs in the first quarter of 2018. This is insubstantial compared to the job turnover that happened over the period. The state economy lost 172,700 jobs and added 215,000 jobs. If residents had to rely on jobs programs to drive economic growth, they would find that policymakers would have been able to replace less than 1 percent of the jobs lost in the economy over the period.
A similar phenomenon plays out in all other states. Taxpayer-funded economic development programs are simply not large enough to have a substantial impact on a complex state economy. The massive increase in government resources such a feat would require is not a policy endorsed by corporate subsidy boosters, because even they realize such a large government expenditure — financed as it must be by tax increases or larger debt loads — could wreak havoc with a state’s economy and be extremely politically unpopular, to boot.
This may be why politicians tend to create programs that are — relative to the state’s economy — small in size. Even the small number of highly publicized job programs allows state lawmakers to be a part of photo opportunities when a new plant opens in their district. Deal-closing funds like the Texas Enterprise Fund might best be characterized as “Ribbon-Cutting Funds” — opportunities for politicians to show up and claim credit for a new factory. In other words, these programs don’t improve a state’s economy, but they do help politicians appear as if they are improving the economy.
Meanwhile, other states have tried their hand for decades at favoring certain industries by awarding tax credits and tailored tax exemptions as enticements for new companies to relocate in their state. A five-year-old estimate of the dollar amount of credits and exemptions based in both the personal and corporate income tax code of a state lands at about $228 billion. Indeed, these numbers dwarf the money committed to “deal-closing” funds or direct grants. Tax credits range from those awarded to companies that create “new jobs” — which they likely already intended to create — to those that help underwrite film production.
The latter credit — the film production incentives that many states still have despite recent repeal efforts — is even harder to justify. The film industry is hardly a mom-and-pop business on the verge of bankruptcy. These tax credits, and others like it, simply funnel money to companies and industries that do not need the help, and, in this specific example, largely finance only temporary economic activity in a state — i.e., only the duration of a television or movie production. Most of the real economic benefit is exported to companies and investors outside the state.
Yet, even though these programs are ubiquitous across the country, studies cited in this paper, many analysts and economists, and even some policymakers, acknowledge that states competing against each other in this manner is, at best, a zero-sum game. The best research on the issue suggests these corporate handouts are actually counterproductive, too costly and potentially damaging to the long-term growth prospects of a state’s economy. Confronted with this reality, some policymakers reply with something along the lines of: “We’d love to stop spending time and money on these, but because other states won’t stop, neither can we.” Consequently, these programs survive and state policymakers often continue to feel an urgency to create their own version of these programs in their state.
This study is an attempt to understand this phenomenon and apply the logic of economic reasoning to not just the programs themselves but to the political environment in which these decisions are made. This is not meant to be a comprehensive review of this literature. Instead, the goals of this paper are to provide policymakers, taxpayers and interested members of the public a framework for thinking about this issue and then use it to support a solution — based on today’s political, statutory and constitutional realities — to limit and perhaps even end this unhealthy competition between the states.