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Commentary

Folly of Incentives


     
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News that Toyota Motor Corp. will delay indefinitely construction of its yet-unfinished North American plant in Blue Springs, Miss., provides further proof, if any is needed, that government should not be in the economic development business.

It also makes plain that government “investments” in infrastructure, green technology and other public works, as proposed in President Obama’s stimulus package, will be little different than other government spending programs, funneling taxpayer money to favored special interests.

Just over a year ago, when gasoline was selling for around $2 a gallon, Mississippi state officials announced with great fanfare that Toyota had chosen Blue Springs as the site for a new, several-hundred-million-dollar facility to produce the company’s popular Highlander SUV. When prices at the pump headed north last summer, the company revised its plans, deciding that Blue Springs would be retooled to produce the suddenly popular Prius hybrid instead. Then the economy collapsed. Mere weeks before Toyota disclosed that it would report a 2008 operating loss—the first in company history—construction at Blue Springs was halted.

Investors in private firms knowingly assume the risks associated with economic events that affect their companies, industries and the broader economy. Toyota’s stockholders were no different. But because state and local officials teed up some $235 million in incentives to lure Toyota to Blue Springs—cheap land, infrastructure improvements, tax relief, low-cost electric power and remedial worker training—Mississippi taxpayers involuntarily will be left holding the bag.

Armed with rosy projections of the economic benefits the Toyota plant supposedly would bring to North Mississippi—new high-paying jobs and new sources of tax revenue—the incentives were an easy sell. Had sober minds prevailed, however, they would have realized the deal was unlikely to pay off.

Purchasers of new cars—if any are left—don’t much care whether their Highlanders or Priuses are made in Mississippi or Timbuktu. They want value. So any money government spends to entice a company to locate here, rather than there, is wasted from a broad societal point of view.

Such incentives also are poor public policy because most companies choose plant sites prior to entering negotiations with local officials. Convincing economic development agencies that their state or city is “in the hunt” often is simply a ploy to extract a more generous subsidy package from the place where they already plan to locate.

There is also no such thing as “free” growth. Even in the rare case where public subsidies actually do attract new business, additional public services will be needed to accommodate the business and its employees. New classrooms will have to be built and new teachers hired, highway budgets will have to be increased to maintain more heavily used roads and bridges, more sanitation workers will be needed, and so on. The extra burden on the public sector needs to be factored in.

When the new company has been granted relief from state and local taxes, the higher tax bill falls on existing residents and businesses, possibly destroying as many or more jobs as the politicians pompously credit themselves for creating in the first place.

The truth is: It is not government’s function to create jobs. Putting people to work is easy, as demonstrated by Franklin D. Roosevelt’s Depression-era Works Progress Administration (WPA), more accurately known as “WPA: We Piddle Around.” The bigger challenge is to create wealth. Toyota failed to foresee the economic events that caused its expansion plans to unravel.

Keep this in mind when Congress and the White House are selecting economic stimulus projects to fund this year.

If highly successful private firms like Toyota—with their extraordinary market research and years of savvy and experience—sometimes embark on projects that turn sour, how can we expect politicians, most of whom have no such business know-how, to pick winners?

There is a difference, however. Companies usually risk their own money. In Washington, the politicians will be risking ours.


William F. Shughart II is a Research Director and Senior Fellow at The Independent Institute, J. Fish Smith Professor in Public Choice in the Jon M. Huntsman School of Business at Utah State University, and editor of the Independent Institute book, Taxing Choice: The Predatory Politics of Fiscal Discrimination.


  New from William F. Shughart II!
TAXING CHOICE: The Predatory Politics of Fiscal Discrimination
So-called “sin taxes”—the taxing of certain products, like alcohol and tobacco, that are deemed to be “politically incorrect”—have long been a favorite way for politicians to fund programs benefiting special interest groups. But this concept has been applied to such “sinful” products as soft drinks, margarine, telephone calls, airline tickets, and even fishing gear. What is the true record of this selective, often punitive, approach to taxation?






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