Economic inequality has been a growing problem in the United States for decades. Some of the big causes are obvious: The decline of unions; the sluggish growth of the minimum wage; regressive tax law changes; greater tax shenanigans, both legal and illegal, by the wealthy and multinational corporations; and skyrocketing pre-tax income for the wealthy.
This list hardly exhausts the reasons. At the state level, one rarely mentioned cause is states’ use of economic development subsidies. What state and local governments give away to large companies increases corporate bottom lines, enriching their shareholders. More importantly, giving away such large incentives robs government of the ability to adequately fund education, infrastructure, broadband and other pro-equality public goods and services.
Political scientist Joshua Jansa has used Good Jobs First’s Subsidy Tracker for his Ph.D. dissertation and two published articles. In them, he shows that using subsidies robs the state of its ability to promote equality, and that economic development policy is largely under the sway of the companies receiving incentives in many states.
Jansa is Associate Professor of Political Science at Oklahoma State University in Stillwater. He answered my questions by email.
Q: Your research finds that the use of economic development subsidies contributes to higher income inequality among the U.S. states. Why would we expect that to be the case in the first place?
A: I expected to find a relationship between subsidies and inequality because subsidies are ultimately a distributive policy – they concentrate benefits among a few wealthy firms and spread the costs across taxpayers. This has the potential to lead to redistribution upward, as employees of wealthy firms benefit at the expense of others, or to retrenchment of the safety net over time, as social spending stagnates as government directs tax benefits toward businesses. I find evidence for the latter explanation in my work.
Q: What was your empirical strategy for approaching this research?
A: I aggregated economic development subsidy spending, using data provided by the Good Jobs First Subsidy Tracker, for each state from 1984-2016. Although incomplete, this data is the most complete picture we can get of how much each state spends per person each year on economic development subsidies. I then used this measure as the primary independent variable in a model of income inequality for each state-year, controlling for other common predictors of state-level inequality over time.
“…subsidies are ultimately a distributive policy – they concentrate benefits among a few wealthy firms and spread the costs across taxpayers”
Q: What did you find?
A: I found that increased subsidy spending is associated with higher post-transfer income inequality, all else equal. What this means is that subsidy spending is having a redistributive effect on the distribution of income in states. Specifically, economic development incentives allow wealthy firms, investors, and employees to keep income that would otherwise be taxed and transferred, leading to more concentration of income at the top and stagnating social spending over time. Through additional testing, I find the effect of incentives on inequality is relatively large compared to other state-level policies, and it is long-lasting.
Q: What can state governments do about inequality?
A: States have some power over the level of inequality in their states. Despite trying to create broad prosperity, states are inadvertently increasing inequality by pursuing large economic development incentive packages. To reduce inequality but still pursue economic development, states could consider creating a broader but fairer tax base such that all businesses—large and small, new and established—obtain certainty as taxes remain stable and relatively low compared to other states. The most direct ways to combat inequality, though, remain making it easier to unionize, increasing wages, and providing a more robust social safety net.
Q: You also used Subsidy Tracker to show that in many places the economic development process is “captured.” What does this mean, and what is the significance of your findings?
A: My coauthor and I use Subsidy Tracker data to find that 1) states direct the vast majority of subsidies to just a few wealthy businesses and 2) the states that spend the most in subsidies also tend to have the highest political spending from businesses. We argue this is evidence that the legislature is “culturally captured” by business, meaning business is so central to politics that policymakers respond to requests for more incentives without seeking countervailing input from other stakeholders. The significance is that the subsidy race is best understood as a response to intense business lobbying for subsidies.
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