Education, not subsidies, brings prosperity,
Fed expert says
By JAN FALSTAD, Billings Gazette - May 19, 2004
The words "economic development" are used again and again
to justify spending public money on incentive packages to lure new
jobs or retain existing jobs.
Speaking out against public subsidies to private industry can be
like trashing mom and apple pie. But, there are plenty of critics
who argue there are better ways to boost the economy than having
states or cities outbid each other for jobs.
The billions of dollars poured into economic development each year
is largely misspent, suggests Art Rolnick, director of research
for the Ninth Federal Reserve Bank in Minneapolis.
The money would be better spent educating needy pre-schoolers, he
said. Getting kids ready for formal education as early as kindergarten
is the real return on tax money.
"The return on investment from early childhood development
is extraordinary, resulting in better working public schools, more
educated workers and less crime," he said. "Yet, early
child development is rarely considered as an economic development
Florida, under Republican Gov. Jeb Bush, and Oklahoma have adopted
the early-education philosophy. Florida passed a constitutional
amendment requiring education for all four-year-olds, not just at-risk
kids as Rolnick advocates.
Studies prove that education continues to pay off.
In the mid-1980s, a person with a college degree earned 40 percent
more over his or her lifetime than someone with a high-school degree.
The spread today is about 80 percent and growing.
A person with a master's or doctorate degree outearned a high-school
graduate by 60 percent in the mid-1980s. The gap today tops 100
By one measure, Montana gets high marks for educating children.
Montana finished eighth highest among the states with nearly 90
percent of its students completing high school in 2002. Minnesota
led the nation in high school grads with 92 percent finishing.
In Montana, about 20 percent of the children age six or younger
live in poverty. The state may have to find as much as $350 million
by October of 2005 to cure what a district judge recently ruled
was inadequate funding for education.
In addition, Montana faces a financial shortfall estimated at $45
million to $100 million, meaning the fight for tax dollars will
grow more intense during next year's legislative session.
Montana's two-year budget includes $2.6 billion in state money.
Directing the dollars
Spending public tax dollars to produce jobs doesn't work for a couple
of reasons, Rolnick said.
Public subsidies distort the marketplace, giving one company an
advantage over its rivals.
In Minneapolis, for example, public subsidies helped build the world-renowned
Mall of America in the suburb of Bloomington. While the mall has
become a huge tourist draw, Rolnick said it drained business from
downtown Minneapolis and St. Paul.
That, in turn, spawned some corporate cannibalism in the Twin Cities.
In the late 1990s, St. Paul subsidized Lawson Software millions
of dollars to move from Minneapolis to its downtown, he said.
"From the state's point of view, there are no new jobs,"
he said. "They just moved the jobs across the Mississippi River."
Tony Schertler, economic development manager for the city of St.
Paul, said the $110 million deal was more complex than that.
The city gave the subsidies to the developer, not Lawson. The deal
got rid of a blighted downtown block and got a 14-story office tower
on the tax rolls. The city spent about $41 million on the package.
Half of that paid for a city owned parking garage which produces
revenues for St. Paul.
Rolnick also criticized the state subsidy given Northwest Airlines,
which promised to build a jet maintenance center in northern Minnesota
providing high-paying mechanical jobs.
Instead, the airline built a reservations center employing far fewer
people than promised. The state wrote the contract tightly and could
have recalled the subsidies, Rolnick said, but instead legislators
rewrote the law to accept the lower-paying jobs.
There are some in Montana who agree with Rolnick, at least as far
as incentives go.
Roger Koopman, president of the Bozeman-based Chamber of Private
Enterprise, is philosophically opposed to providing subsidies to
"When you unravel the whole thing and look at the basic principle,
a bidding war against other states never works," Koopman said.
"The problem is that you tend to create winners and losers.
If you've got government allocating money, it creates dependency
in place of true entrepreneurship," he said. The Chamber of
Private Enterprise is open to private businesses that pledge to
refuse government subsidies.
Key factors in a move
When a business decides to relocate, Rolnick said studies show that
it looks first at whether the new city has a quality workforce,
good schools and whether the location works logistically.
"Low on the list are subsidies. Most will say - at least after
they've received their subsidy - that they are low on the list,"
he said. "We estimate that 80 percent of the subsidies go to
businesses that would have come anyway."
Rolnick readily admitted that that is a "very soft number"
based on interviews with executives, not hard numbers.
Hard numbers are difficult to come by, he said. There are too many
variables and assumptions to conduct good science.
His viewpoint is supported by a Economic Policy Institute study
which found that state and local taxes make up just 0.8 percent
of a company's costs, so they aren't a big factor in a company's
decision to expand or move.
"Luring industries with tax breaks is a boondoggle," the
It also said that when tax dollars are skimmed off public programs
like improving education or roads, economic incentives may hurt
the economy, not help it.
"The bottom line is that state and local taxes, at their current
low levels, may be largely irrelevant to business investment decisions,"
the report said.
Boosteriam political, not economic?
Subsidies with tax dollars can also result in conflicts of interest.
"Crony capitalism" is too strong a word, Rolnick said,
but politicians tend to see that the public subsidies go to businesses
that are or become supporters.
"We think it's bad economy. It's bad political science and
it's bad from a political perspective," he said.
Politicians, he said, like to point to a new factory or building
as proof they've accomplished something economically, so that's
why tax subsidies keep winning over longer-term projects like improving
Congress needs to act, Rolnick said, to stop what the states from
playing what he calls the "zero-sum game of economic development."
Rolnick worked to have a bill introduced in the U.S. Congress in
1999 banning states from competing with each other with public tax
dollars. The bill would require private companies to declare public
subsidies as income and tax those subsidies. Such subsidies are
now exempt from taxes, he said.
He pointed to the big push by the Minnesota Vikings and Minnesota
Twins to get tax dollar subsidies to build two sports stadiums for
each team 22 years after the Metrodome was constructed. Eliminating
tax breaks for the subsidies is one way, he said.
On May 4, the $1.2 billion bill to subsidize the stadiums passed
the House Taxes Committee on a 15-13 vote.
The bill limits the state subsidy to $100 million out of $535 million
cost for the Twins. The state funding for the Vikings is limited
at $185 million out of a $600 million stadium.
The teams would have to pay one-third of the costs and the community
that lands the stadium must pay the balance. The bill was later
killed, then potentially given new life in a trade for a gambling
casino in northern Minnesota.
Taking away the tax benefits would help keep private-sector decisions
like stadiums on the right economic track, Rolnick said.
"They would have to make their decisions based on where the
fans are or where the best location is," he said.
However, that big picture view, Rolnick said, isn't shared by most
cities as seen in the competition between Butte and Billings to
win the Bresnan Communications call center and its 100 jobs.
Following 18 months of deliberations, Bresnan chose Billings after
receiving promises of $1.6 million in tax subsidies and other incentives
from the Big Sky Economic Development Authority.
"From Montana's point of view, why are they letting them spend
public dollars for this when they could be funding schools or roads
or lowering taxes on all businesses?" he asked.
"But from a parochial view, if I was the mayor of Billings,
I'd be out there doing the same thing."
For more information:
To read Art Rolnick's papers, go to: http://minneapolisfed.org/pubs/fedgaz/03
and search for "Early Childhood Development: Economic Development
with a High Public Return" and "Congress Should End the
Economic War Among the States: Federal Reserve Bank of Minneapolis
Annual Report Essay."
To read the Economic Policy Institute study, go to: www.epinet.org
and look for "Rethinking Growth Strategies"