Today's Wall Street Journal writes on the failure of taxpayer-funded "economic development" grants - i.e. corporate welfare - in the state of Michigan.
The article relies heavily on a study by the Mackinac Center.
The remorse is almost audible in when people talk about the loss of filmmaker M. Night Shyamalan's new movie Devil to Canada, ostensibly because of the budget impasse. What this really means is that stakeholders such as film production units and, of course, Mr. Shyamalan himself are upset that more taxpayer dollars have not funded the multibillion dollar industry, even while state lawmakers are considering tax hikes on working Pennsylvanians.
The film tax credit program is unlikely to have a significant positive effect on employment and incomes in Pennsylvania. Numerous economic studies find that tax incentives for professional sports teams and facilities create no positive net gains in income and employment. A report in the Patriot News contends that the "motion picture industry" employment statistics reveal growth of a mere 556 jobs from 2002 to 2007. That's not the bonanza some would have us believe. Ideally, lawmakers should give that money back to taxpayers and let them invest it as they see fit, rather than letting politicians pick this one bizarre industry to shower with favors and get little payoff.
If rationality is not something lawmakers ascribe to, they should watch some Shyamalan's most recent productions. The Happening, which released in June, 2008 had terrible reviews from most critics.
Gov. Rendell has noted on many occasions that without large state "economic development" grant programs, Pennsylvania's economy would tank. He has argued that the Senate budget, which would eliminate many of his opportunities to hand out giant cardboard checks to corporations and take credit for, would accelerate the current recession.
So now that Pennsylvania has gone almost two months without a state budget, and had no money for economic development grants, what does Gov. Rendell say about the effect this loss corporate welfare funding? From FYI by PLS:
Governor Ed Rendell was joined by Department of Labor and Industry (L&I) Secretary Sandi Vito to announce positive economic development news today during the Governor’s press conference. Governor Rendell explained that an internal L&I memo showed that from July 25th to August 7th there were only five business closings as compared to 13 business expansions or openings, which will result in 1,852 jobs created.The lesson: not using taxpayer funding for corporate welfare is good for the economy.
Harley-Davidson continues to tour business friendly states to re-locate its York plant that employs over 2,000 workers - among the four options considered are Shelbyville, Indiana and Shelbyville, Kentucky. I imagine the final meeting between Harley and York officials might look something like this Simpsons' scene, in which Lyle Lanley sells a Monorail by threatening to go to Shelbyville, hooking Mayor Quimby (channeling Gov. Rendell) and the crowd with a song and dance. (Hat tip to Simpsons aficionado Ryan Shafik of the Lincoln Institute).
So what do these other states have that Pennsylvania doesn't? How about lower taxes and worker freedom. Pennsylvania has both the 2nd highest corporate income tax rate in the U.S. - 2nd highest in the world as a matter of fact. Pennsylvania is also one of few states that also hits businesses with a Capital Stock and Franchise Tax, which even Gov. Rendell acknowledges is a huge impediment to keeping businesses in Pennsylvania.
Compulsory unionism is also driving jobs to other states. Business location expert John Boyd explains, "This spring that the trend for company relocation within the United States has been from the North to the South, where a big attraction is Right-to-Work laws in southern states."
And AFP points out that Right-to-Work states experienced a 17.6% increase in job growth compared to an 8.9% increase in Union shop states from 1997-2007.
At 9.99% PA's Corporate Net Income Tax is the 2nd highest in the U.S. and our Capital Stock and Franchise Tax, a 1.89-mill levy on corporate infrastructure (given the budget) may not expire in 2011 as planned. With taxes like these it's no wonder Rendell is scrambling to keep manufacturing jobs in the Keystone State.
In a recent Central Penn Business Journal article PMA's Dave Taylor points out, "Most states make businesses pay one or the other, not both. There’s a lot of reasons why businesses choose to locate in an area, but taxes are the marquis because it’s easy to calculate."
Recently, PA offered Carlisle Tire and Wheel (340 jobs) $6.9 million to stay in Pennsylvania, but Tennessee offered a sweeter deal - reportedly three times that amount. Obviously, Rendell hopes his current mission to woo Harley Davidson with $15 million is more successful.
Instead of competing with other states to offer more goodies for business Pennsylvania should lower taxes. These perks cost taxpayers more money in administrative costs, allow the government - not the consumer - to pick winners, and actually slows economic growth. Cutting taxes and corporate welfare would shrink the state bureaucracy while growing the economy - just ask Texas.
In Empire Strikes Back Lando Calrissian tells his old friend Han Solo that "I've just made a deal that will keep the Empire out of here forever" before leading Han, Princess Leia, and Chewbacca to Darth Vader. Later, Lando regrets the deal, noting it keeps getting worse all the time, as Vader keeps changing the terms of the agreement. Later, in Return of the Jedi, Lando redeems himself by helping rescue Han from Jabba the Hutt.
Unfortunately, Pennsylvania has been duped just like Lando in the past, for instance, "making a deal" to keep Harley Davidson in York forever. Pennsylvania awarded Harley over $4 million in taxpayer funds since 2000. But unfortunately, Gov. Rendell is not a Star Wars fan, and has not learned the lesson of Lando Calrissian.
While Harley has threatened to move out of state again because of the high cost of doing business in Pennsylvania, Rendell could have moved to adopt business-friendly policies, and he should have realized that Harley Davidson was using him to leverage more corporate welfare (or perhaps to capture Luke Skywalker and convert him to the Dark Side).
Instead, Rendell has fallen prey for their ploy again, promising to deliver Harley Davidson "a package of offers to entice the motorcycle company to stay in Springettsbury Township." Rendell should know better by now, given the failure of his economic policies.
This week, Philadelphia plays host to the National Conference of State Legislatures conference. No Pennsylvania legislators have been able to attend the gathering because they're needed in Harrisburg for potential votes on a state budget that's now three weeks overdue.
But despite this fact, Pennsylvania taxpayers are putting up $1 million for the cost of the meeting. Defenders of this cost in the administration and legislature claim that this is the chance for Pennsylvania to show itself off and the boost in tourism it will realize from the event makes the $1 million investment worthwhile. (One defender even comments that taxpayers saved because the Philadelphia Convention Center didn't charge for hosting the event in the facility taxpayers paid to build.)
This is misguided economics. Taxpayer funding to promote tourism is not a core function of government, and has not improved Pennsylvania’s economic climate. The so-called "multiplier effect" of spending taxpayer dollars to attract visitor fails to account for the opportunity cost - that is, that money could have been spent elsewhere, or taxes could have beend reduced by that amount. And the idea that tourism would not occur, or Philadelphia could not attract a conference of legislators, without taxpayer funding is absurd.
On Thursday, the Legislative Budget and Finance committee heard testimony evaluating the effectiveness of the Keystone Opportunity Zone (KOZ) program. The KOZ is an “economic revitalization” program that provides businesses in distressed communities with state and local tax exemptions. That testimony ultimately concluded that the program is seriously flawed and in dire need of improvement.
For starters, the committee appointed to evaluate the program found many inaccuracies and inconsistencies within the KOZ’s own data that prevented much “comprehensive and quantifiable assessment of the program.” For example, data on the number of jobs created and the amount of capital invested is self-reported by program participants. It came as no surprise then that these numbers were substantially overstated and appeared to represent a mix of both actual and estimated figures.
Also of note is that many KOZ participants are providing little, if any, job creation or capital investment in return for the tax exemptions and investments they receive. In fact, some 75% of reported participants didn’t create any jobs.
If that wasn’t bad enough, the Department of Community and Economic Development does not even have a method to calculate total program costs. Therefore, it is impossible to run a cost-benefit analysis to determine if KOZ-related “job creations and capital investment” (see above) justify the amount of state and local tax revenues being forfeited.
The study did find some measurables, however. Statewide, only 30% of KOZ acreage is being developed, whereas some 70% of designated land is largely undeveloped. Additionally, no business has ever been deemed “not qualified” by the Keystone Opportunity Zone program.
The full joint committee report on Keystone Opportunity Zones can be found here, with a summary of findings here.
The Patriot News has a scathing editorial against Pennsylvania's Film Tax Credit. Here is the deathblow:
A closer look at the "motion picture industry" employment statistics (cited in the report) reveal growth of a mere 556 jobs from 2002 to 2007. That's not the bonanza some would have us believe.Here is our recent take on the study and more on film tax credits
One of our PolicyBlog readers sent us a note that the researchers contracted to do the study of the Pennsylvania Film Tax Credit (click here for our comments on the absurd assumptions of that study or the Tax Foundation blog on the same topic), were not academics or independent analysts, but a Hollywood-based consulting firm, with numerous movie studios as their clients.
Indeed, a quick perusal of their website reveals the following description:
ERA is the leading economic consulting firm serving the entertainment and leisure development industry. We offer a wide range of economic, financial, marketing, planning, and management consulting services to both private and public clients. Since our first study for Walt Disney some 50 years ago, ERA has pioneered the analytical techniques and methodologies related to the planning, development and operational evaluation of many of the world’s leading attractions.Their clients include:
Tad Dehaven has a worthwhile read on the Cato Institute's blog about why state corporate welfare subsidies make good politics, but bad economics:
Instead of competing with other states to attract industry by lowering taxes and reducing regulations, it seems most state governors prefer a politically opportunistic method I call “press release economics.” Here’s how it works:For readers in the Rendell adminstration who may have just stumbled across this blog just today and are thinking, "Wait!? Corporate welfare doesn't work?," I recommend reading this post on Harley Davidson, or my commentary on why government can't cure our economic woes, or Matt Brouillette's testimony on the failure of Pennsylvania's corporate welfare schemes under both Republicans and Democrats.
A state “economic development” agency offers an out-of-state company (or even an out-of-country company) tax breaks and/or direct subsidies to locate some or all of its business operations in that state. Most likely, the business would have located there anyhow due to myriad factors including demographics, transportation logistics, and workforce capabilities. ... The company and the governor’s press staff then typically arrange a photo-op at an orchestrated ground-breaking ceremony for the new facilities. ...
My suggestion that the governor eliminate or reduce the state’s high corporate income tax rate, and “pay for it” — at least in part — by getting rid of the state’s corporate welfare apparatus, was routinely ignored for the reasons I cited above. That one would be hard-pressed to find support among the economics profession for the state corporate welfare give-away game means little to the majority of policymakers and their minions who naturally favor short-term political gain over long-term economic gain. That other companies already located within the state are stuck paying the regular tax rate, and are thus put at a competitive disadvantage, is a secondary or non-concern as well.
The Pennsylvania Legislative Budget and Finance Committee issued a report on the state's film tax credit, concluding that the $75 million program generates over $500 million in economic activity and "pays for itself". (See stories in the Tribune Review and the Patriot News).
Wow. This contradicts what the Commonwealth Foundation, along with the Tax Foundation, have said about the film tax credit. Could we be wrong?
No, not if you read the caveats in the study:
While some of this activity would occur without the benefit of the FTC, a significant proportion of this activity would be at risk without such a tax credit program. As part of this analysis, ERA did not quantify what proportion of this activity would be at risk.In other words, they assume that every single film receiving the tax credit would have filmed in another state, or not at all, if it were not for the tax credit. This is of course ludicrous. Many filmmakers admit they would have filmed in Pennsylvania regardless, but took the credit because it was free money.
While there is a net fiscal loss when comparing the net present cost of the Film Tax Credit program ($58.2 million) to the taxes generated by productions directly receiving tax credits ($17.9 million), there is a net fiscal gain to the Commonwealth of $4.5 million when considering all of the revenues generated by the entire industry.The study adds in not only the effect from films receiving the credit, but the effect of all films in Pennsylvania - including the vast majority which did not get the tax credit. How exactly does this measure the effect of the film tax credit? Again, it assumes no one would film in Pennsylvania without the tax credit (despite their own chart showing the amount of filming done in Pennsylvania before the film tax credit had been enacted.)
Letter sent from the Commonwealth Foundation to Pennsylvania Deputy Secretary of Tourism Mickey Rowley
Dear Mr. Rowley:
I am writing to respond to the Pennsylvania Tourism Office’s recent press release on Senate Bill 850. We contest the claim that reduced state tourism spending will “severely impact Pennsylvania’s economy by costing thousands of jobs and closing small businesses.” This backward, reactionary thinking confuses the cause of Pennsylvania’s budget deficit for its solution.
You note that in 2008, Pennsylvania’s tourism industry provided $18 billion in wages. Clearly, the industry has enough revenue coming in to fund its own advertising and promotion; it doesn’t need a few million dollars in taxpayer handouts.
Furthermore, you provide misleading statistics in your press release by only accounting for Marketing to Attract Tourists while excluding funding for Tourism Promotion Assistance. Senate Bill 850 appropriates $13.5 million to promote tourism. This is far too much taxpayer funding for something which is not a core function of government, and which has not improved Pennsylvania’s economic climate. Indeed, the $25.7 billion contributed by visitors to Pennsylvania is an increase of only 15 percent from 2003, yet state taxpayers’ subsidies to the tourism industry increased 41 percent over the same period.
Your citation of the Colorado experience undermines your claim that reducing tourism spending would damage the economy. Colorado’s overall economic growth went from the bottom of the 50 states to near the top during the 1990s. Furthermore, you cite Ohio, Michigan, and California as exemplary examples of states which subsidize tourism. Yet these three states are the worse for it—all rank near the bottom of the nation in economic growth business climate. All are losing residents to other states, and rank among the leaders in out-migration (even leading Pennsylvania in this dubious category). And all are facing dire fiscal crisis due to the combination of overspending and economic stagnation. These are not states Pennsylvania should be emulating.
Most importantly, you fail to consider how higher taxes to pay for state spending will affect the tourism industry, and Pennsylvania’s entire economy. Senate Bill 850 moves Pennsylvania in the right direction, adopting fiscally responsible policies that decrease tax burdens and put spending decisions back in the hands of citizens. This will draw tourists and businesses to the state better than any government agency.
In Liberty,
Matthew J. Brouillette
President and CEO
Harley Davidson's announcement that they may down their plant in York, PA illustrates the problem with taxpayer funded corporate welfare.
For starters, Harley Davidson has received $4.3 million in state grants since 2000 for their York factory - ostensibly to "create or retain jobs". Yet despite what should be a clear lesson, Pennsylvania's two U.S. Senators - Bob Casey and Arlen Specter - are already scrambling to get another deal done (see their letter here).
Instead, consider what Harley Davidson officials have stated - they are considering the move because "York is not competitive long term ... due to cost pressures," but they are "exploring other possible locations within the U.S." This implies that the economic climate in Pennsylvania is unwelcoming, compared with other states. There are two possibilities:
1) Harley officials, like Mario Lemieux, are bluffing. They have no intention of moving, and are only angling for more taxpayer aid. In which case, lawmakers would be foolish to oblige.
2) They are telling the truth - Pennsylvania's economic climate isn't good for them. They would have plenty of evidence supporting this. Unfortunately, that economic climate is bad for all Pennsylvania businesses. Instead of offering new funding incentives specifically to benefit Harley Davidson, lawmakers should ... wait for it ... work to improve Pennsylvania's economic climate.
Some early criticism coming from the Rendell administration about the Senate budget is that cuts to the Department of Agriculture will result in less farming and possibly event mass starvation. There are two myths behind this rhetoric.
The first being that agriculture is the “number one industry”; there is no data behind this cliché, it is simply something politicians say to pander to farmers and rural voters. Second is the nanny-state idea that unless taxpayers subsidizing farming, it won't happen.
Most economists agree that agriculture subsidies are not good for the economy, or even for farmers, and Cato gives the top ten reasons to cut farm subsidies. Our Spending Tips 2009 identifies plenty more state agriculture programs that should be cut from the budget, not increased.
The fact is that the average farmer receives little support from agricultural subsidies, most of these go to large corporate farmers and land-holders. Furthermore, the items cut in the Pennsylvania budget were largely programs like "Pennsylvania Fairs" and "Agriculture Marketing" - feel-good programs which do nothing to put food on the table.
In contrast, take the case of New Zealand, which ended all agricultural subsidies in 1984. Not only did their farm industry not collapse, it thrived like never before
If Rendell is truly concerned about helping farmers, he should work to repeal the state's inheritance tax, which affects family-owned farms, rather than the corporate farms taking much of the subsidies.
Amazon is closing distribution centers in three states, including one in Chambersburg, Pennsylvania. Just last year the state "helped" the world's leading on-line retailer to open a new distribution center in Hazleton, and it only cost taxpayers $1.75 million.
We hear again and again that we need to "invest in our state" to bring more jobs to Pennsylvania. But corporate welfare doesn't create new jobs, it's just an expensive way of redistributing them with your tax dollars.
State Representatives Mike Turzai and Tom Quigley unveiled a plan to cut about $170 million wasteful spending from the Pennsylvania state budget ($130 million relative to Gov. Rendell's proposed budget) by cutting a number of corporate welfare programs. All of these cuts, along with many others, were identified in our report, Government on a Diet: Spending Tips 2009.
| Turzai-Quigley Cuts (Thousands of Dollars) | |||
| Program | 2008-09 Enacted | 2009-10 Proposed | |
| Opportunity Grant Program | $28,000 | $18,268 | |
| Infrastructure Development | $22,500 | $20,500 | |
| Community Conservation and Employment | $44,610 | $24,913 | |
| Infrastructure and Facilities Improvements Grant | $27,000 | $35,500 | |
| Economic Advancement | $17,800 | $9,910 | |
| Community and Regional Development | $15,900 | $12,570 | |
| World Trade PA | $14,075 | $8,986 | |
| Total | $169,885 | $130,647 | |
The Tax Foundation points out that at least one governor is proposing eliminating his state's tax credit for Hollywood films. As we have noted, tax credits for movies don't bring economic gains to the state, partly because filmmakers who take the money would have filmed here anyway.
State Sen. Pat Vance has a proposal to place a moratorium on Pennsylvania's $75 million tax credit for Hollywood films like Zack and Miri Make a Porno.
A news story on Philly.com covers some Republican lawmakers complaints that Governor Rendell budget cuts are too steep, at least in regard to agriculture subsidies (HT Grassroots PA). Rep Denlinger and Sen. Brubaker are quoted in defense of government subsidies for "the state's largest industry" and "state's number-one industry".
I honestly have no clue where the "top industry" label comes from, but I'm sure it plays well politically in some districts. But agriculture is not Pennsylvania's largest industry in any regard, not by a long shot - it is 22nd out of 22 categories in number of jobs provided, and 19th out of 19 categories in contribution to GDP. And it remains last despite getting heavy subsidies from both state and federal taxpayers.
Most economists agree that agriculture subsidies are not good for the economy, or even for farmers, and Cato gives the top ten reasons to cut farm subsidies. Our Spending Tips 2009 identifies plenty more state agriculture programs that should be cut from the budget, not increased.
If lawmakers are truly concerned about helping farmers, they should repeal the state's inheritance tax, which affects family owned farms, rather than the corporate farms taking much of the subsidies. And some lawmaker - like Rep. Will Tallman - are working on this issue.
A Capitolwire (subscription) headline reads "DCED acting secretary says little state can do to create jobs," after a hearing in which Secretary Cornelius notes that "economic development" programs have little effect on job growth, something we have discussed repeatedly.
In the Pittsburgh Tribune Review, Governor Rendell admits the $553 million spent on the North Shore Connector was a waste of money, as the funds could have been used elsewhere. Again, we have also noted that the problem in transportation infrastructure isn't a lack of funding, but misspending of that money, as have others.
So now that the Rendell adminstration is on the same page, will they start following our policy recommendations and cut corporate welfare and reform transporation spending? Will Governor Rendell reject the federal stimulus funds, like some governors are considering, as it won't help the economy and will only stimulate more government waste?
