Virginia Cheap with Incentives… Back in 2012

by James A. Bacon

According to an in-depth study based on 2012 data, Virginia dedicated a lower percentage of its GDP to economic-development incentives than all but three of the 50 states and the District of Columbia. The Old Dominion’s $57 million in incentives that year amounted to a measly .0133% of the state’s economy — a little more than one-hundredth of one percent.

Crucially, Virginia also ranked 5th nationally in its consistency in enforcing agreements to make sure companies live up to commitments regarding level of investment, job creation and job quality. On the other hand, the state ranked only 18th in transparency in online disclosure.

So concludes Kenneth P. Thomas, a University of Missouri political scientist in a policy brief published by the Mercatus Center, “The State of State and Local Subsidies to Business.

Incentives take many forms: cash grants, tax breaks, loans, free land, loan subsidies, and bargain prices for water, sewer or electricity. The states bestowing the most lavish incentives were Alaska (No. 1), Louisiana, Michigan, Washington, and Hawaii, each of which expended almost three-tenths of one percent or more of their economy on subsidies.

The champion cheapskate by Thomas’ reckoning was Wyoming, which allocated all of one-half of one-thousandth of a percent to incentives.

Important to note: These findings were based on 2012 data, before Virginia rolled out the red carpet for Micron Technologies and the Amazon HQ2 projects.

Thomas dislikes incentives as a matter of principle. As conservatives argue, grants and subsidies distort economic decision making about where to allocate capital, thus hindering economic efficiency. Liberals regard incentives as a mechanism to transfer wealth to the wealthy — there is no moral justification, for example, for subsidizing subsidize Amazon and its owner Jeff Bezos, the world’s wealthiest human being. 

Thomas calls attention to a profound information asymmetry at work that advantages corporations. 

Companies have learned how to be more successful at their rent-seeking efforts, including the use of location consultants that exacerbate the information asymmetries always present in the site selection process. Companies always have an information advantage over governments when bargaining over site locations and subsidies because there is so much information available about locations and governments, and governments have no way to know critical information about companies, such as whether those companies are comparing competing alternative locations, what their true investment plans are, etc. Consultants can widen this gap by maintaining information on multiple locations, or even by conducting negotiations with governments without identifying the companies involved in the potential investment, for example.

A change to government accounting rules may make the use of incentives more transparent, allowing for more after-the-fact analysis. Statement 77 in state and local government Comprehensive Annual Financial Reports (CAFRs) are supposed to report tax-based subsidies (which constitute the majority of subsidies). The first reports were very uneven in quality, and it may take years before CAFRs to become uniformly complete and informative, Thomas says. But it’s a start.

Optimistically, Thomas writes: “Researchers are poised for a breakthrough in subsidy transparency that should greatly improve the knowledge base for making good policy for state and local subsidies and investment incentives.”

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One response to “Virginia Cheap with Incentives… Back in 2012”

  1. Dick Hall-Sizemore Avatar
    Dick Hall-Sizemore

    I have always been skeptical of subsidies. I seriously doubt that subsidies actually are the deciding factor in the vast majority of location decisions. Consistently, companies list location, accessibility to transportation, the nature of the local work force, and the local business climate as the driving factors in their decision making. Any subsidies are icing on the cake.

    Even more aggravating are the subsidies given to existing companies when they plan to expand. It is hard to imagine the company that would elect to go through the trouble and expense of relocating, rather than expanding its existing facility, because of the lack of some subsidy.

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