An old New York joke tells us, “only schmucks pay retail,” a humiliation you know if you’ve had a vacation ruined by some twerp sitting next to you at a cruise ship bar delightedly boasting that he paid only half of what you did for the cruise. Sometimes schmuck abuse is elevated to a moral principle. I used to have a boss who would raise prices on foolish clients – charging “stupid fees” he called it – on the grounds that doing so reallocates money to those who use it wisely – meaning himself – thereby increasing economic efficiency.
But, to be a really big schmuck, that is, someone who squanders huge sums of money unnecessarily and without benefit, you have to be either really rich (however briefly) or a state – West Virginia, for instance.
The New York Times recently published, “United States of Subsidies: a series examining business incentives and their impact on jobs and local economies” by Louise Story, Tiff Fehr and Derek Watkins. The centerpiece of the series is a study that quantifies the amounts that states lavish on businesses in the form of incentives, subsidies, loans, grants and other inducements ostensibly to generate commerce and create jobs.
Not surprisingly, the results of these inducements are frequently less than those predicted by the politicians and bureaucrats who promote them and the businesses that receive them.
That may explain why West Virginia, a state with zero net job growth since the year 2000, is second among all states in per capita subsidies.
According to the Times study, West Virginia provides $1.57 billion – yes, that’s “billion.” not “million” – in subsidies and tax abatements to businesses every year. That’s $845 for every man, woman, and child in the state. It’s equivalent to 37 percent of the state’s base budget and more than we allocate for education, or Medicaid, or roads or prisons. In short, if business tax incentives were listed as an expenditure, it would be the state’s single largest item in the budget.
By way of comparison, none of the states that border West Virginia spends even half as much. Pennsylvania is the next highest at $381 per person. As for the others, you have to add together Maryland ($96), Virginia ($161), Ohio ($281) and Kentucky ($324) in order to match West Virginia’s generosity.
And West Virginia’s use of tax incentives isn’t necessitated because we start with unusually high tax rates. The Tax Foundation’s 2013 ranking of state business tax climates rates West Virginia 23rd in the nation, ahead of all those neighboring states except for Pennsylvania, which comes in 19th.
So, what has our munificence won us, what has it cost us and what does it mean?
As mentioned earlier, West Virginia has had no increase in the number of jobs in the state in the last 12 years. That’s the period during which the state became most aggressive in cutting business taxes and extending incentives. While one can argue that conditions might have been worse in the absence of these measures, there’s a stronger argument that the measures made little difference.
Peter Fisher, research director at the Iowa Policy Project, recently published an analysis showing state and local tax rates are not significant determinants of business growth. The reason is that these taxes make up a tiny fraction of business’ operating costs. Business decisions about where to locate and whether to expand are far more influenced by factors such as demand for products and services, the availability of a qualified labor force, access to raw materials and suppliers and infrastructure.
In fact, unless those needs are met first, the question of taxes doesn’t even come into play. And, when it does, it’s in the context of operating costs. In that area, West Virginia already offers wage and utility rates that are 20 percent below the national average – a market-based financial incentive that far outweighs any advantage to be offered through tax incentives.
Meanwhile, the loss of $1.57 billion a year in prospective business tax revenues has dire consequences for the rest of us. First, it’s forcing West Virginia to make significant cuts to education and infrastructure at a time when, if we hope to attract and grow businesses, we must figure out ways to meet companies’ needs for a skilled workforce, infrastructure and an improved quality of life.
Second, West Virginia’s tax burden is being shifted from businesses — many of which are out-of-state interests — to individual taxpayers. Since 2005, while the portion of state revenue collected from business income and franchise taxes has dropped from 13 percent to 4 percent, the portion collected from West Virginia families has risen from 30 percent to 42 percent.
And for what? Economic development? Or is it just corporate welfare? The problem is we can’t tell the difference.
That’s because, while handing out corporate goodies, West Virginia does almost nothing to track the results — either to hold companies accountable on those rare occasions when they actually make commitments to get the incentives, or merely to determine the state’s return on investment.
In a way that’s the worst aspect of the fiasco because, by itself, trying and failing to nurture business growth through tax incentives doesn’t make our political leaders schmucks. It just means they’ve made mistakes. They become schmucks when, because they require no accountability, they don’t know they’ve failed and, consequently, go on repeating the same mistake indefinitely or, in West Virginia’s case, about 1.57 billion times per year.
— Sean O’Leary can be contacted at firstname.lastname@example.org or at his blog, the-state-of-my-state.com, where you can also find a version of this column that contains links to all data sources.