Imagine that someone forcibly takes your hard-earned money and then simply gives it to a multi-billion dollar corporation such as Home Depot, Wal-Mart, or Boeing. You receive no benefit from this forcible redistribution of wealth, and the sole beneficiary is the corporation. You would most likely be outraged, and justifiably so. Unfortunately, this forced redistribution of wealth happens in Oklahoma (and the nation as a whole) all the time via a variety of state and local corporate welfare schemes.
Policymakers either take your hard-earned money (via taxes), and directly subsidize large corporations or give those corporations tax breaks nobody else can get. All of this is done in the name of jobs and economic development, but these favors bring very little (if any) benefit to you. This is tyranny, plain and simple. In fact, it is not unlike the sort of advantage nobility took of commoners before the American Revolution, only the modern nobility is just very good at lobbying. In the 1889 Institute’s most recent publication, Policymaker’s Guide to Corporate Welfare, we condemn the practice of corporate welfare, offer policymakers a simple guide to evaluate proposed and existing instances of corporate welfare, as well as offer a list of solutions and alternatives.
The guide asks five basic questions in order to help policymakers ascertain what constitutes corporate welfare. To over simplify, if the answer to Question 1 is Yes, and the answer to Questions 2 through 5 is No, a policymaker can be very nearly certain that the policy in question is corporate welfare.
Let’s walk through an example. Suppose Amazon is looking for a new distribution center location. This entails dozens, perhaps even hundreds, of jobs to the state blessed with Amazon’s presence. Elected policymakers, anxious to claim they helped to “create” jobs, jump at the opportunity to bribe Amazon to locate in Oklahoma. The likely truth is that Amazon will locate wherever is best suited for them, regardless of any incentives offered by government. However, from Amazon’s perspective, if it helps the bottom line, why not? So, in an effort to make themselves appear to accomplish something, policymakers supposedly entice Amazon to bring its distribution center to Oklahoma. The Governor offers Amazon a $3.5 million direct grant from the Quick Action Closing Fund. In addition, the state offers a tax rebate for the first ten years that the distribution center is located in Oklahoma.
Question 1: Is this a direct grant of funds or reduction in taxes to a private entity without an expectation of direct consideration (performance of services or provision of goods) to the government making the grant?
A “Yes” answer means that this program or initiative is very likely corporate welfare. After all, giving money to a corporation with essentially no strings attached looks a whole lot like a gift. Of course, policymakers argue this isn’t a gift since the company is expected to create jobs and pay taxes. There’s only one problem, that’s literally what companies do, regardless. Is that really something we should pay them for? Lots of small businesses create jobs and pay taxes without government giving them refunds.
Question 2: Does a grant of funds or tax consideration apply to every similarly situated business?
Our guide states that a “No” answer means the program or initiative could very likely be corporate welfare. Exclusivity is a major indicator of corporate welfare, as the government is simply picking winners and losers by granting a competitive advantage to certain businesses over others. By contrast, those businesses that the state did not bless with your tax dollars might have to make major changes or shutter their doors as a result of the competitive advantage given to rivals. Government officials should not substitute their political judgment for that of citizens expressed through markets.
Question 3: Does an apparent tax advantage put businesses on an equal footing?
If the answer is “No” the policy is likely corporate welfare. There is absolutely no indication that the governor handing $3.5 million to Amazon places it on an “equal footing” with other businesses in the state. Any contention to the contrary would be absurd. Amazon is already a multi-billion dollar corporation that likely has an advantage over other businesses given its size and profitability, and gifting Amazon large sums of money or tax abatements artificially exacerbates those differences.
Question 4: Is the purpose of this policy to avoid tax pyramiding?
If a policy is intended to avoid tax pyramiding, then it is sound tax policy, not just according to our guide, but according to experts of any ideological stripe. Tax pyramiding occurs when a product is taxed at multiple stages of production, meaning the final sales tax will be partially a tax on taxes from earlier production stages. This inflates the cost of the final product, distorts consumer purchasing decisions, and distorts production chains. In the case of the hypothetical Amazon giveaway, there is no pyramiding avoidance, so that cannot be used as an excuse for the policy.
Question 5: Is the policy compensating a company for public infrastructure the company provided?
A “No” answer to this question could indicate that it is corporate welfare. There is no argument to be made here. Public infrastructure consists of roads, sewers, and other public investments that benefit everyone, none of which are created by Amazon bringing a distribution center to Oklahoma. A distribution center does not fall into the realm of public infrastructure, thus rendering another “No” answer.
In sum, in our Amazon hypothetical, the answer to Question 1 is Yes and the answer to Questions 2 through 5 is No. As a result, a policymaker can be fairly certain that the policies like the Amazon giveaway are corporate welfare. These policies should be rejected entirely.
Given this information, and the academic research that indicates expansion decisions made by businesses are not substantially impacted by state-offered subsidies, the question must be asked: why do policymakers continue to offer economic incentives? The answer is political capital. Granting favored status to big businesses allows policymakers to rub shoulders with the rich and powerful, while also getting their chance for ribbon-cutting photo opportunities that give these policies the appearance of success. These opportunities are so politically beneficial that policymakers are willing to waste taxpayer money and frustrate honest consumer choices to reap those benefits. That or they think Jeff Bezos needs your money more than you do. Regardless, it is a complete and utter disgrace. A better question might be: why do we continue to tolerate such behavior from our elected representatives?