In the Spotlight

News & Features
The Economic War Among the States: Letters

Comments from an Indiana study
My comments are based on business subsidy research I conducted in Indiana. I examined several state and local tax abatement and training grant programs. Data for 1993 were obtained for 2,873 individual firms. The dollar value of tax abatements was over 2.5 percent of the total net property tax levy for the state.

Added together, direct expenditures and foregone tax revenue under all the state subsidy programs amounted to nearly $200 million dollars in 1993 alone. Between 1982 and 1993, tax deductions represented more than $800 million dollars in foregone revenue. Companies received another $93.8 million in direct training grants during the period 1989-1994. Consistent and rapid growth in the utilization of these subsidies was evident.

I can only assume the Indiana data looks like that in other states. The wide scope of the data, both in the number of firms and in the dollar value of economic development subsidies suggest the difficulty in systematic evaluation. Much more information is needed to determine the value of targeting public resources to individual firms.

In theory, subsidies provide incentives for individual firms to invest in capital and human resources. It is assumed that public investments will produce a highly skilled workforce and rising standards of living. However, there is little accountability and incentives seldom are linked to performance. Aggregate descriptive data do not include information on firm product markets, profitability, technological change, wages and salaries, skill composition or work organization variables.

Multi-million dollar subsidies to profitable corporations are based on an expectation of proportional net benefits to the public good. The major barrier to a return on investment is the so-called "free-rider" problem. In markets where all firms can share in the benefits, skill training will be provided only where individual firms do not incur significant costs. In a competitive labor market, training is narrow, increasing productivity only within the particular firm.

Policies should include individual worker incentives for education. Valid arguments for human development aside, the economic justification for this proposition is relatively straightforward. Assuming the firm incentive for education is an increase in marginal productivity, for individuals it is an increase in income. For individual workers to accept a wage that reflects a "learning curve," there must be some assurance wages eventually approximate marginal productivity. These investments are best protected by utilizing enforceable training contracts. Joint union-employer apprenticeship programs are a successful model.

If firms fear skilled worker mobility when seeking public subsidies, public expenditures actually can diminish earnings. The development of standards which protect competition and innovation in product markets should be extended to include protection for labor markets as well.

Public accountability for economic development initiatives is critical, particularly at the local level. A long-run strategy based on the fiscal largesse of local taxing authorities is as risky as the derivatives market. Can communities sustain a steadily rising proportion of public investment that cannot be used to support the local tax base?

Jeff Vincent

Indiana University
Institute for the Study
of Labor in Society

Top - Letters - The Economic War Among the States