from Renewing America

In Defense of Business Subsidies

May 19, 2014

Blog Post
Blog posts represent the views of CFR fellows and staff and not those of CFR, which takes no institutional positions.

More on:

Corporate Governance

This is a guest post by Ronald R. Pollina, President, Pollina Corporate Real Estate, Inc., Park Ridge, Illinois, written in response to the recent publication of the Renewing America Policy Innovation Memo, Curtailing the Subsidy War Within the United States.

In their New York Times op-ed, Edward Alden and Rebecca Strauss argue that state and local subsidies intended to lure or retain businesses are wasteful and “about as dumb as it gets” from a national perspective.

I graciously disagree. These subsidies are a necessary way to correct for U.S. competitive weakness.

American companies are competing in a vast, highly-competitive global arena. Economics are forcing companies to look very hard at finding the best and most economically competitive locations from which to work. The United States is simply very far from being a low-cost competitive location for business. U.S. corporate taxes are the highest in the world, labor and general operating expenses are also among the highest in the world, and our infrastructure is failing. U.S. businesses are also among the most regulated in the world, adding considerably to operating costs.

Incentives help to level the international playing field. Most states and communities, and especially the federal government, should be offering more to grow business. We have failed our companies, especially small and mid-sized companies that create most of the nation’s jobs. Without jobs, we do not stand a chance of improving our economy and decreasing poverty. Without jobs, we stand no chance of stopping the downward spiral in the size and health of our middle class.

In my work in the site selection business, we continue to find that U.S. companies do not want to consider growing their business in the United States. These are jobs that, in many cases, could and should have stayed in the United States had governments at all levels been more pro-business. Many politicians believe incentives are required to compete with the state or community next door. I have found that they are increasingly essential to compete with locations like Mexico, Brazil, China, and Vietnam.

Incentives cannot completely level the playing field, but they can help keep some jobs from going offshore. Unfortunately, many political leaders are not aware of the severity of business-related problems. Business leaders are reluctant to voice such problems, as they are concerned with being labeled anti-community, greedy, anti-labor, or racist. Even when a business expresses itself by relocating from a community, it rarely makes the true reasons for its relocation public.

During a relocation study, one of the most frequently asked questions by corporate executives of their consultant is “what is the attitude of state and local politicians toward business?” The best indicators of attitude are education, taxes, infrastructure, and incentive packages offered.

Yes, incentive funds would be better spent on improving conditions for business growth. If the U.S. and state governments created a more pro-business environment, there would be no need for incentives. The problem with this is the federal government and most states have simply done a pathetic job at creating such an environment, and the state of our economy is clear evidence of this failure.

Some governors and state legislatures “get it” and are making the effort to create a pro-business environment, but most do not. While it would be a very rare governor or mayor who did not espouse their commitment to job creation; unfortunately most are not willing to follow through on their pro-business rhetoric.

The relocation process is complex, with numerous variables to consider. State and local financial incentives are one very important factor that can make a company more competitive and profitable. Incentives have developed into a highly competitive method for states and communities to keep existing companies and for luring corporations into relocating.

Taken alone, incentives are a poor reason to relocate. However, when evaluated in the context of a full location analysis, incentives can become a key element of the final selection decision and a company’s success.

More on:

Corporate Governance