Tax Dollars for Costco

Marc Kilmer May 23, 2011

The forces of corporatism won another battle last week as the Montgomery County Council rejected a proposal to block the county from giving $4 million to a developer that is building a Costco in Wheaton. Deals like this are problematic for many so many reasons that I can’t sum them up in one blog, so today I’m going to focus on the idea that they are needed to create jobs. On Wednesday I’ll talk about their effect on political corruption.                                    

Politicians in both parties love “economic development” deals. It gives politicians the appearance of doing something to create jobs, even though government-directed economic growth schemes have a long history of failure. The appearance, not the reality, is what’s important in politics. It’s much better for politicians to allocate money to a business, get their picture in the paper for a ribbon cutting, than to pursue true pro-growth policies.

One state that has been in the forefront of government-sponsored “economic development” is Michigan. As Michael Lafaive, who works for the Mackinac Center in that state, points out, a study done by the Citizens Research Council (CRC) on tax abatements indicates there are few benefits (the logic applies to other subsidies, too):

…CRC noted in a different report that the tax abatement is used most by local governments with the highest taxes. In other words, tax abatements may be necessary to avoid losing businesses to low-tax areas. Of course, other factors may play a role in business development, too. Low-tax areas may also have great schools and low crime rates, which no doubt play an important role in business and location decisions.

Does the tax abatement method meet with success? Not as much as if local officials simply would keep taxes low in the first place. CRC found that greater economic growth takes place in jurisdictions where taxes are low and which consequently grant fewer abatements. CRC found that "50% of high tax jurisdictions experienced low growth, whereas only 18% of the low tax jurisdictions and 19% of the medium jurisdictions experienced low growth." This suggests that keeping the economic playing field level and offering no special favors yields better results than government picking winners and losers through the use of tax abatements.

In a previous story on the Costco deal, Council member George Leventhal said that “the public needs to understand it’s what’s necessary to attract jobs and investment to the county.” If that’s true, then it’s a pretty damning indictment of the business climate in Montgomery County. If the only way you can get job creation is to have the government hand out subsidies, then your county is in real trouble.

In fact, these incentives are another symptom of the problems caused by the government for those looking to start or expand businesses in Montgomery County. The government officials want to micromanage the decisions of business owners and consumers, so they enact a variety of laws and regulations to restrict the choices of business owners and consumers. Then they turn around and give subsidies to favored businesses.

As Lafaive notes, these types of incentives distort the economy: “public-sector intervention simply displaces private-sector initiative. It sends private businesses scrambling for the biggest tax abatement they can get, instead of looking for ways to satisfy the desires of their communities and make more consumer-friendly products.”

Moving towards a system of less intrusive regulations and a low, flat tax rate would do much more to create jobs in Montgomery County than its policy of handing out cash to a few politically-favored businesses. But this would mean that politicians would have to give up a lot of their power to tell others how to run their lives. I don’t know how realistic that is for a jurisdiction like Montgomery County.