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Center for American Progress

RELEASE: As Members of Congress Ask GAO to Investigate Effectiveness of Economic Development Subsidies, CAP Releases New Issue Brief on the Realities of Business Incentives
Press Release

RELEASE: As Members of Congress Ask GAO to Investigate Effectiveness of Economic Development Subsidies, CAP Releases New Issue Brief on the Realities of Business Incentives

Washington, D.C. — Today, as members of Congress wrote to the U.S. Government Accountability Office (GAO) expressing concerns about economic development subsidies—such as those provided to Foxconn Technology Group in Wisconsin—the Center for American Progress released a new issue brief on the realities of these business incentives, highlighting potential downsides that rarely are fully appreciated by policymakers, the news media, or the general public.

“Economic development subsidies may make great fodder for elected officials and the press, but it’s time to take a closer look. Too often, these deals are opaque, lack requisite oversight, fail to deliver promised results, and may unfairly increase the burden on taxpayers,” said Andrew Schwartz, author of the brief.

CAP’s issue brief outlines the following realities around economic development incentives:

  • Economic development incentives often are not crucial to where firms locate. Businesses consider a wide variety of variables when deciding where to locate a headquarters or a branch, including real estate availability, workforce and education, infrastructure, access to markets, community, and quality of life. State and local taxes, however, which average less than 2 percent of the total costs of doing business nationally, are not a major consideration, according to research conducted by Good Jobs First and the Iowa Policy Project.
  • Benefits from incentive deals may not live up to the promises. The announcement of potential deals almost always includes the number of jobs and
    the amount of total investment. However, these rosy projections may not be borne out, as firms may change their business models or even go out of business altogether.
  • Subsidies may result in diminished public services. When state and local governments commit taxpayer resources to providing incentives,
    there are opportunity costs. In many cases, these include an inability to fund education, provide affordable housing, or contribute to “rainy day funds.”
  • Governments competing for businesses by providing incentives is often a zero-sum game. It is bad tax policy to narrowly target subsidies that lead to differing tax incentives for companies in the same sector. State and local governments end up with a haphazard economic development strategy. Instead, a level playing field—paired with investments in infrastructure, workforce, and other public goods—would make a place more attractive to a wide variety of businesses.
  • Transparency and evaluation of incentives are minimal. Incentives frequently happen through opaque processes, with little information on
    important aspects like total subsidy amounts. Taxpayers would not accept a comparable lack of transparency on infrastructure or education spending from a public entity; yet these tax expenditures receive minimal oversight, and governments sometimes even actively conceal information.

The brief arrives as Reps. Mark Pocan (D-WI), co-chair of the Congressional Progressive Caucus, and Lloyd Doggett (D-TX), ranking member of the U.S. House Subcommittee on Tax Policy, sent a letter to the GAO expressing concerns about business incentive packages, including the level of evidence that they effectively generate economic development, the level of vetting prior to approval, and state and local government use of federal funds.

Pocan and Doggett’s letter to the GAO requests that the agency conduct a review and issue a report on the net economic effects generated by economic development subsidies; how the federal government evaluates the effectiveness of economic development policies within the federal agencies; whether coordination on economic development subsidies takes place among federal agencies and state and local governments; and whether federal agencies have taken action to enforce relocation and other provisions intended to ensure that program purposes are met. The members of Congress also asked the GAO what improvements can be made to processes at the federal, state, and local levels to better understand the effectiveness of economic development programs and to what extent can federal authorities encourage further transparency in economic development.

Click here to read “The Realities of Economic Development Subsidies” by Andrew Schwartz.

For more information or to speak with an expert, contact Allison Preiss at [email protected] or 202.478.6331.