Recent estimates of taxpayer-funded subsidies to companies by state and local governments are as high as $80 billion a year. These funds are often used under the guise of attracting new investment or encouraging existing companies to expand. But do these policies work?
Kansas and Missouri have become the poster children for how these policies can go wrong. Millions of dollars have been spent moving companies back and forth across the Kansas City border. This “border war” often elicits finger-pointing from economic development officials in both states and claims that that neither side will “unilaterally disarm.” If Kansas offers subsidies, so must Missouri. And vice versa. The poster children sound a little like my toddler son.
But the question remains. Do these policies work? In Missouri, as many as 80 percent of the incentives have been canceled due to companies not meeting their job creation targets. Job creation promises are made. Most aren’t kept.
How do the Kansas programs perform? I recently prepared an analysis of the $300 million Promoting Employment Across Kansas (PEAK) program. Does this program create jobs? This is a tough question since the firms that apply for these grants are probably already considering moving or expanding. To see if these companies are associated with “extra” jobs, I examined company job creation like we would in a science experiment: control group and experimental group. Thus I compared firms that received PEAK incentives (experimental group) to firms that are very similar (same size and industry) that did not receive incentives (control group). The average firm received about $2.5 million from the state coffers.
How many extra jobs did these firms generate?
I found on average they created 45 fewer jobs than other Kansas firms over a period of six years. To be fair, in academic speak, these differences are not statistically significant. So all we can really say is that the PEAK program isn’t associated with any job creation. Isn’t that bad enough?
My study found that these incentives don’t help create jobs in the long run. But what about attracting new firms to Kansas? Kansas attracts companies from around the country and around the globe. Not with the PEAK program. They are mostly from the other side of the Kansas-Missouri border. Thus it isn’t even clear that “new” firms are actually hiring “new” workers.
When I presented my results on the PEAK program at a conference in Kansas City, I was mostly met with nods of agreement. When you talk with economic development professionals, economists, local businesses, or anyone that has seen the inside and out of these programs, they are not surprised by the ineffectiveness. Most studies of incentives find that the majority of firms are receiving checks for things that they were going to do anyway.
If the PEAK program is not creating jobs and it is costing the Kansas taxpayers, why does this program continue? The common refrain is still a refusal to “unilaterally disarm.”
But this excuse for wasting taxpayer money is not only becoming old, it is becoming obsolete. Missouri Gov. Jay Nixon signed a bill establishing a moratorium on border jumping relocation incentives in the Kansas City area. But to go into effect, this requires Kansas to pass similar legislation. A disarmament treaty is on the table.
Voters, academics, the Kansas City business community and counterparts across the border in Missouri agree these policies must be stopped. Gov. Sam Brownback is running for re-election and major policy changes during election years can be politically risky. But elections are also the time when voters yield the most power. Ask your politicians if they think this program is working. Can you justify giving a company $2.5 million for creating no jobs?
Nathan Jensen is an associate professor in the department of international business at the George Washington University School of Business. He can be reached at firstname.lastname@example.org.
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