Subsidy packages put together by state and local governments almost invariably include some component of federal funding.
Federal dollars for state-level corporate welfare is textbook government waste.
A merican taxpayers are funding the competitors in the accelerating race between the states to the bottom of the corporate welfare swamp, and it’s time for that to stop. The Trump administration’s decision to undertake a comprehensive review of federal agency spending gives it an opportunity to make that happen.
In the name of “economic development,” states and cities across America are engaged in an ongoing fiscal conflict in which billions of dollars are transferred from taxpayers to private companies in an attempt to influence where things such as factories, headquarters, data centers, or stadiums are built.
The evidence shows that companies’ site selection decisions are rarely changed by these government subsidies, but that’s largely beside the point in this case. Rather, federal spending watchdogs should be aware that the subsidy packages put together by state and local governments almost invariably include some component of federal funding.
The federal programs dispensing these funds are ripe for the kind of efficiency and effectiveness review envisioned by the administration. The Council of Development Finance Agencies’ “Practitioner’s Guide to Economic Development Finance, 3rd Edition” is a useful tool in this regard. Produced for professionals in the economic development industry, the book outlines 147 different federal programs across 18 different departments or agencies.
Any one of these programs might have a laudable intent or be defensible in the abstract. But these programs are used by canny bureaucrats, developers, and lobbyists as ammunition in site selection battles. The result is a zero-sum game for short-term economic growth.
The last notable effort to add up a price tag for state and local economic development programs was in 2019 when researchers estimated a cost of roughly $95 billion. For perspective, that was enough money at the time to fund the 11 smallest state budgets combined. Or, to put it in a federal budget context, $95 billion could have funded not only all federal food assistance programs in 2019, including SNAP, WIC, and school lunches, but also two new Gerald R. Ford-class aircraft carriers.
Most of that $95 billion was state and municipal, not federal, spending. But federal programs contributed to that total, and budget cutters should pay close attention to these federal programs. Trump campaigned on promises to impose fiscal discipline on the federal government, whether through an OMB-mandated review process, the Department of Government Efficiency, or some other mechanism. This creates a rare opportunity to get federal taxpayers out of the business of funding states’ corporate welfare shenanigans.
A few years ago, we learned the hard way what happens when you let opportunities like this go by. In June 2020, Michael Farren (then of the Mercatus Center) and I co-authored a working paper warning that federal Covid relief programs would create an environment in which state and local elected officials would use the expected surge in federal funding to engage in bigger (and dumber) subsidy projects than ever before. We suggested that Congress use its constitutional authority over interstate commerce to require states to cease fire in the corporate welfare wars as a condition of receiving federal Covid aid.
The thinking was that Congress could finally give governors what they’ve been saying they want, which is an opportunity for multilateral disarmament. Governors regularly claim that they’d prefer not to do subsidy deals, but that they can’t afford to “unilaterally disarm” if neighboring states do not. The proposed Covid truce would have provided an opportunity for state politicians to live up to their stated desires and lay down their subsidy weapons.
Congress let that opportunity pass, and the results were worse than we’d even feared. Sadly, 2022 turned out to be the worst year in history for state corporate welfare megadeals, with a dozen subsidy agreements with price tags of a billion dollars or more. Taxpayers will be bearing the burden of those budget-busting deals for decades to come.
The evidence is clear that state and local governments will spend every single dollar the federal government is willing to give them to fund economic development deals that do more economic harm than good. If President Trump, Elon Musk, and other federal budget hawks are looking for places to cut wasteful federal spending, getting the federal government out of the zero-sum game of state economic development programs is a great place to start.