State Government Business Subsidies in the News

Federal energy subsidies to business are a hot national topic thanks to the Solyndra scandal. Flying below the radar---and deserving more national media attention---are grants and other targeted incentives given to businesses by state governments. There is little doubt in my mind that there are state-subsidized “Solyndras” waiting to be discovered.

The Wall Street Journal took a step in this direction by noting in an editorial that a struggling lithium-ion battery maker subsidized by the Obama administration also received handouts from the State of Indiana. The editorial chides the administration for having “made a habit of investing your cash in their clunkers.” A series of investigations from WTHR-TV in Indianapolis has demonstrated that the administration of Indiana Gov. Mitch Daniels shares that same bad habit (see here).

The Journal editorial’s concluding lines correctly sum up the problem with government subsidies to businesses:

Better to leave commercial financing decisions to private investors and bankers who are likely to take more care with their own money. Politicians write the press releases first and worry about the taxpayer losses later.

As I’ve previously discussed, it was my experience as a state budget official in the Daniels administration that led me to coin the phrase “press release economics” to describe these subsidies. Indeed, WTHR’s investigations of the Indiana Economic Development Corporation showed that the Daniels administration was adept at taking credit for “creating jobs” that never materialized.

It might seem like I’m picking on Daniels, but he’s hardly alone. The Wall Street Journal recently ran an article on similar shenanigans in Texas Gov. Rick Perry’s administration:

In Texas, Mr. Perry in a 2011 report to the legislature credited the Texas A&M Institute for Genomic Medicine with already producing more than 12,000 additional jobs. That's ahead of the 5,000 promised by 2015.

According to the institute's director, however, 10 people currently work in its new building. A Houston-area biotech firm that agreed to produce about 1,600 of the project's jobs has instead cut its Texas staff by almost 400 people, and currently employs 220 people in the state.

What accounts for the discrepancy? To reach their estimate of 12,000-plus jobs created by the project, officials included every position added in Texas since 2005 in fields related sometimes only tangentially to biotechnology, according to state officials and documents provided by Texas A&M. They include jobs in things like dental equipment, fertilizer manufacturing and medical imaging.

Republican governors aren't the only ones who enjoy playing pretend venture capitalist with taxpayer money. The Mackinac Center for Public Policy’s Capitol Confidential reported this week on state subsidies given to Michigan solar companies by the administration of now-former governor Jennifer Granholm:

Michigan Capitol Confidential took a look back at the nine solar power companies that were approved for state tax credits. Many have fizzled with reports that the companies are laying off employees at a time they were supposed to have been adding jobs.

For example, in 2009 a company from Georgia called Suniva announced it planned to open a $250 million manufacturing plant in Saginaw County. It was to add 500 jobs. Media reports said the company is holding off plans for a Michigan plant after deciding not to pursue a Department of Energy loan.

Energy Conversion Devices and United Solar Ovonics are affiliated companies that have been approved for state tax credits for four different projects that were supposed to add about 5,700 jobs. Both companies announced layoffs this year.

Evergreen Solar opened a solar plant in Midland in 2009. The company announced in August it was filing for bankruptcy.

I’ll end on a (hopefully) positive note. Taxpayers in New York fed up with the state handing out their money to businesses have been fighting a long-running battle to end the practice. The New York State Court of Appeals is currently hearing a lawsuit brought by 50 taxpayers that challenges state grants given to business.

From the Associated Press:

The taxpayer group cited a provision in New York's constitution that says: “the money of the state shall not be given or loaned to or in aid of any private corporation or association, or private undertaking; nor shall the credit of the state be given or loaned to or in aid of any individual, or public or private corporation or association, or private undertaking.” It has an exception for funds or property used for education and mental health.

Defendants countered that the funding for public purposes through state-designated economic development agencies is supported by law and precedents and doesn't violate the constitution. “Doesn't that just invite evasion?” Judge Robert Smith said. “All you've got to do is put an intermediary between the state and the recipient?”

Hopefully, Judge Smith’s question foretells a favorable outcome. A win for New York taxpayers could raise the issue’s profile and embolden fed-up taxpayers in other states.