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Government should forgo gold shovels, oversized scissors

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There’s nothing quite like the bipartisan schadenfreude experienced when the hubris of politicians leads to a failed business incentive deal. The Wisconsin-based Foxconn project and Amazon HQ2 in New York are dead for very different reasons. Foxconn, which once promised 13,000 jobs at a mega-plant in exchange for $4 billion in subsidies, has Trump and Scott Walker detractors snickering alongside anti-subsidy conservatives. They’re not laughing in Mount Pleasant, Wisconsin.

As Foxconn walks back its promised investment to a rather pedestrian looking “technology hub,” critics are taking victory laps while locals struggle to pay for the land purchased for Foxconn.

Sean McCarthy

Sean McCarthy

While some of the incentives would only be realized if Foxconn meets hiring goals, they are eligible to receive refundable tax credits, meaning they can get cash from the state even if they don’t have tax liability. The Wisconsin Budget Project estimates roughly $1 billion in Foxconn assistance isn’t related to job creation at all.

The dubious prospect of manufacturing television displays in America and the sad trail of failed Foxconn projects around the world just don’t seem to matter if a politician can use a ceremonial gold plated shovel.

Lessons abound. First, elected officials should avoid telling their critics: “They can go suck lemons. The rest of us are going to cheer and figure out how we are going to get this thing going forward.” Former Governor Walker will now eat, or rather suck, his words. Officials in New York have some explaining to do as well. History gives the public the right to be leery over “legacy projects” from politicians.

The second is our leaders would do well to remember that even when incentive deals result in new business, their average impact in the broader economy is hardly noticed. Deals that subsidize retail operations are particularly silly, considering the amount a population has to spend on retail doesn’t change simply because there are new places to spend their money.

These stories remind us that companies ultimately make market-based decisions where local subsidies make for a fraction of their consideration.

Elected officials further justify incentives based on future tax revenues generated by the project. Pretending the incentive has no harmed party because the growth wouldn’t otherwise happen insults the business cycle. If that were the case, why shouldn’t all new projects get five years of tax-free existence? If it’s new, no one loses, right?

A strong Arizona economy in 2018 grew total sales taxes roughly $800 million. This means the Arizona economy did roughly $10 billion more in taxable sales in one year alone. The individual income tax grew roughly $400 million. In the last five years, these two tax categories have grown $2.66 billion.

Increased tax revenues come from an improving economy, not one-off development deals coordinated at city hall or the Capitol. Creating a business friendly environment for all is the fairer way to manage economic development. Accelerate business licenses, use less restrictive zoning, improve infrastructure, and refrain from harassing new projects with unnecessary government input.

Despite the evergreen temptation to involve itself in the market, the government should resist the gold shovels and oversized scissors and commit themselves to the difficult and mundane work of improving government functions for all.

Sean McCarthy is the senior research analyst for Arizona Tax Research Association.

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