Lawmakers in state capitols across the country have sown some seeds of progress in reining in corporate welfare. This is an important shift. Corporate welfare fundamentally undermines a free and flourishing economy. It is an insidious use of government power to create special privileges for the well connected few.
Florida had one of the year’s biggest successes. Just before adjourning, the state’s legislators ended a multi-million dollar corporate welfare program in existence since 1996. They did this by simply denying the $250 million in funding Gov. Rick Scott requested for “Enterprise Florida.” Scott and other Florida leaders rightfully want to compete for new businesses and win — there’s nothing wrong with that. But state legislators recognized that funneling tax dollars to politically favored industries and companies — something many states do — is the wrong way to do it.
It was a tough fight, and it’s still making headlines. The governor and his allies launched a statewide public relations campaign arguing that the funding was necessary to “incentivize” businesses to move to, or expand in, the Sunshine State. And, of course, create jobs. Noticeably absent from their arguments, though, was just how the quarter of a billion dollars of taxpayer money would be spent. One state senator remarked that “Exactly how that $250 million gets spent is really secondary to the fact that we’re going to put it out there, we’re going to tell America, all the companies in America, that we’re going to have this money.” Really?
These types of corporate welfare “enterprise funds” are often the vehicles elected leaders use to claim that their actions create or save jobs. But these job promises frequently do not pan out. For example, during one six-year period, the Michigan Economic Growth Authority incentive program created only 14,000 jobs of the 123,000 promised. Little wonder it was abolished in 2011. A scathing audit of the Texas Enterprise Fund found, in addition to serious procedural deficiencies, that jobs created fell significantly short. Perhaps growing word of these kinds of results inspired Gov. Scott’s call for auditing Enterprise Florida after its funding was killed.
When politicians hand out corporate welfare, this incentivizes businesses and their interest groups to lobby for even more corporate welfare. Politicians then end up picking winners and losers based on their connections.Consumers — and the taxpayers — are left holding the bag. So are the businesses that don’t have the connections, or sell the products or services deemed politically desirable.
Corporate welfare takes more forms than subsidies. It includes regulations, which protect industries or groups against the competition. For example, more than 30 states have laws that require special training to obtain a license to work as a natural hair braider. Their origin goes back 80 years when a small group of beauty shops in Washington, D.C., wanted to limit the competition. So they pushed for a bill in Congress that required an expensive cosmetology license just to braid natural hair. This cosmetological corporate welfare spread to many states. Although cosmetologists, large beauty shops, and salons won, enterprising stylists who simply wanted to braid natural hair lost. And so did their customers.
Stifling the competition through subsidies or regulations raises costs for consumers. But it also means that existing businesses don’t have to work as hard to control their own costs, maintain or improve quality, or innovate with new products or services. No matter how you look at it, corporate welfare creates more losses for consumers, businesses and entrepreneurs than benefits for the privileged few.
Other states besides Florida have also recognized this simple fact in recent months and taken action. For example, Kentucky and Nebraska both exempted natural hair braiding from cosmetology licensing. In January, New Jersey’s governor vetoed a tax incentive program for the film industry.
Last year, Texas eliminated one corporate welfare fund that had given the governor nearly $500 million to award in grants for technology. Sadly, Texas still has several other programs including its Enterprise Fund. But legislators did trim it to $90 million last year and, following the audit, created an oversight board to provide accountability and transparency. Elsewhere, Michigan built on its 2011 progress and lawmakers threw out the state’s film subsidy program.
These states all recognized the same thing: Private businesses and entrepreneurs should be profitable on their own based on the value they create for their customers. Not by pursuing government privileges from politicians. More states should follow their lead.
Alison Acosta Fraser is the managing director of research and policy at the Charles Koch Institute. You can find her on Twitter at @alisonafraser. Thinking of submitting an op-ed to the Washington Examiner? Be sure to read our guidelines on submissions.
