Semantics, lack of data create large gray area

Ronald A. Wirtz | Editor, fedgazette | @RonWirtz

Published April 1, 2000  | April 2000 issue

Criticizing business subsidies in local economic development has become a popular pastime for the media and others (including the Minneapolis Fed). Often missing from the discussion, however, is any attempt to set parameters around what is—and importantly, is not—considered a subsidy.

For the purposes of the fedgazette articles in this issue, public spending on economic development is not considered a subsidy when it provides some "public good" (like roads, education, safety and other community infrastructure) and the direct benefits of this spending are nonpreferential, or widely available to all businesses.

On the flip side, public spending on economic development is a subsidy when public resources are spent in a preferential manner—that is, given to specific companies rather than being widely available to businesses.

Even this seemingly clear-cut definition has many pitfalls. For example, many programs have overtly social or environmental goals at their core. Such programs were not included in the analysis contained in these articles, nor were a wide range of enhancement programs targeting farming operations.

This and other qualifications expose an expansive gray area regarding business subsidies, some of which is a matter of necessity. Regardless of how clearly one defines business subsidies, providing the reader with comprehensive data on the subject is difficult due to the sheer breadth and complexity of hundreds of economic development programs and the fact that little reporting is required of them (particularly outside Minnesota).

As such, generalizations are necessary to keep readers from drowning in the pit of minutia and focused on the big picture. But the trade-off in sacrificing a clear subsidy parameter is a blanket charge that all economic development programs are nothing more than corporate giveaways in disguise. Clearly, some programs subsidize business, while others do not, at least not directly. Most coverage of this issue, however, glosses over such distractions.

Below is a brief description of common economic development programs that provide the base for many individualized efforts, and an explanation of where they lie on the subsidy-or-not-a-subsidy continuum. Ultimately, the intention here is not necessarily to dictate where the subsidy line should be drawn, but to give fedgazette readers an editorial reference point as they read the articles in this issue.

Nonpreferential, "public good" economic development

Most any public works or infrastructure program fits this mold because annual public expenditures on roads, sewers, parks, airports and the like are considered to produce public goods that benefit all citizens.

Some economic development programs—mostly at the state and federal level—also provide public resources explicitly for community infrastructure. The federal Community Development Block Grant (CDBG) Program, for example, doles out billions to states every year, who pass the money on to local communities for physical and social infrastructure projects.

In many cases, this investment is a precursor to business development. For example, communities use grants and other funding to improve industrial parks to attract new businesses. Such spending is not considered a business subsidy because the resources were used to create public infrastructure and did not benefit a specific company at the time of the investment.

Preferential subsidies to businesses

Business subsidies are clearly evident in a number of economic development tools and programs that offset various business costs and provide no obvious public good in return.

Tax credits and abatements, for example, forgive a business certain portions of its annual tax liability—typically either property and/or income taxes. The Michigan Economic Growth Authority (MEGA) awards credits to businesses against the state's single business tax. Sometimes, a particular program might encompass a stable of different tax credits. Michigan's Renaissance Zone Program waives upwards of a half-dozen major state and local taxes.

Grant programs—mostly from state and federal governments—provide businesses one-time money for everything from equipment or land purchase, or to write-down the costs of site and plant improvements.

The vast "gray area" of business subsidies

Unfortunately or conveniently—take your pick—most economic development programs do not fit neatly inside or outside the box of business subsidies. Given wide-ranging missions, eligibility requirements and resources, many programs are able to sidestep any obvious charge of giving away the public farm to businesses.

Public loans to businesses, for example, appear on the surface to be widely available to all businesses, but generally benefit only a small number of businesses that cannot get financing through a commercial bank, or cannot afford commercial interest rates. Being quasi-preferential, such loans also subsidize business by using public dollars to write-down the cost of capital.

The biggest dog on this block is the federal Small Business Administration, but low-cost loan programs are available through several other federal agencies. Each state also has its own cadre of loan programs, and hundreds of revolving loan funds at the local level provide below-market rate financing to businesses in need of capital.

Some grant programs also have one foot in and one foot out of the business subsidy box. Oftentimes, federal and state grants are funneled to local development organizations, which use the grant money for public infrastructure projects, business assistance programs and organizational operations. Most revolving loan funds, for instance, are initially capitalized by state and federal grants. The king of gray, however, is tax increment financing (TIF), a tool widely used in Minnesota, Wisconsin, and to a lesser extent in all Ninth District states. (See detailed discussion of TIF.) TIF creates very obvious public goods—typically new roads and sewers—yet also redirects an enormous amount of public money that benefits a comparatively small handful of businesses.

Related articles:
fedgazette, July 2000
Local Economic Development, Part II