Dave Trabert: Incentives can make the economy worse

07/20/2014 12:00 AM

07/18/2014 5:38 PM

Some people routinely extol the benefits of handing out taxpayer money to a few chosen businesses, and now the city of Wichita wants to create a sales tax that would generate $90 million for business subsidies. Proponents say subsidies are necessary for economic development; some even go so far as to call the practice “essential” and “critical.”

Albert Einstein, on the other hand, might call it “insanity,” as government has been giving away Other People’s Money (OPM) for decades and still expects different results.

Subsidy proponents may have noble intentions, but they don’t consider the unseen consequences of their actions.

Dealing in OPM actually worsens economic conditions for those who don’t receive subsidies. The lucky few recipients certainly benefit, but their gains come at the expense of everyone else. Citizens pay higher taxes to generate the subsidies and shoulder the burden of tax abatements. Businesses not subsidized by taxpayers are also disadvantaged.

Washington University political science professor Nathan Jensen is co-author of a study that examined the use of subsidies in Kansas. A recent Kansas.com story about Jensen’s research said that he concluded: “There is ‘no evidence’ that those oft-used tax incentive programs have any positive effect on job creation. In fact, by cutting into public funds that could have been used for other programs that, say, spur private investment or fund research, and by making it harder for employers who do not receive tax breaks to compete in the market, the programs may actually have a detrimental effect.”

Jensen found that in the six years after incentives were awarded, “the firms who received incentives actually generated slightly fewer jobs than those that didn’t receive incentives.” The Kansas.com article went on to report: “After the initial bump resulting from their relocation, Jensen found that transplanted companies were no more likely to generate jobs than similar companies that were already operating in their state.”

Proponents of subsidies, earmarks, etc., talk about the jobs they believe were “created,” but they don’t provide the whole story. Jensen’s research showing subsidies having little positive effect on job creation and the Sedgwick County jobs data certainly bear that out. According to the U.S. Bureau of Labor Statistics, private-sector jobs grew just 1.1 percent between 2003 and 2013. Aerospace employment declined 8.8 percent even though the industry collected a lot of taxpayer money over that 10-year span.

It’s fair to say that the aerospace decline is affected by the global economy and should be discounted, but then economic development programs should not be credited for job growth in the education and health care sectors. BLS counts many public school employees as private-sector workers, and Wichita’s aging population is primarily responsible for the growth in health care.

Guess what? A grand total of 536 other private-sector jobs were added in Sedgwick County, for a scant growth rate of 0.6 percent.

The best things government can do to promote job creation is to eliminate unnecessary regulation, operate more efficiently, stop dealing in OPM and use the savings to reduce property taxes.

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