119 8 Q UIT P LAYING F AVORITES : W HY B USINESS S UBSIDIES H URT OUR E CONOMY Michael J. Hicks and William F. Shughart II West Virginia, like many other states, uses targeted tax incentives in an attempt to stimulate economic growth.
Targeted tax incentives (tax abatements, infrastructure financing or, in some cases, outright grants of public funds) are fiscal tools designed to entice a private firm to a new location, to support an existing business 9s expansion plans, or to prevent a company from relocating to another city or state. In West Virginia these programs have ranged from tax credits for the aerospace industry, to subsidies for hydroelectric power generation, to direct aid for individual retailers. Despite the wide variety of incentives offered, there is little evidence that these efforts have generated benefits worth their true economic costs.
While a broad, low-rate tax structure is conducive to economic growth (see Chapters 5 and 6), selective tax incentives are a different story altogether. They are tools of central economic planning that distort relative prices and profit rates, and destroy wealth by encouraging firms to shift resources into obtaining these preferential government favors. This chapter 9s purpose is to help ... more. less.
the reader better understand the role targeted tax incentives may play in state and local economic development.<br><br> We begin by discussing the efficacy of selective tax incentives, with special attention to the political factors that explain their popularity. We then provide a summary of the findings of scholarly research addressing the actual impacts of targeted tax incentives on employment, incomes and economic growth. That discussion is followed by a section detailing West Virginia 9s specific experiences with incentives.<br><br> Based on the available evidence, we end by concluding that the state 9s prosperity would be enhanced by abandoning its selective incentive program (and dissolving the economic development agencies that offer them) in favor of broad-based tax cuts and other pro-growth initiatives that benefit business in general rather than a few politically favored companies. UNLEASHING CAPITALISM requires West Virginia to replace 8business-friendly 9 with 8market-friendly 9 policies. U NLEASHING C APITALISM 120 T HE E FFICACY OF T AX I NCENTIVES Despite the evidence (summarized below) suggesting that targeted tax incentives rarely produce benefits that exceed their economic costs, public officials nationwide nevertheless engage in an ongoing arms race to sway business location choices by offering inducements such as temporary relief from sales, property or corporate income taxes, upgrades to local infrastructure, and subsidies for worker training programs.<br><br> Such sweeteners, frequently financed by issuing bonds, typically are justified by studies conducted by consulting firms purporting to show that large numbers of new jobs will be created as a result. These ex ante forecasts typically sum estimates of the numbers of workers employed by the company receiving the subsidy and by suppliers that will be enticed to locate nearby. An employment or income 8multiplier 9 is then applied to the job total as a way of estimating the indirect economic impact induced by additional spending on housing and at local retail establishments.<br><br> These so-called economic impact studies often are seriously flawed, however. As a result, they grossly overstate the employment and income gains associated with a new or expanded plant. A common error is to count all of the people employed at the subsidized facility as a net addition to the local workforce and to count the total wages paid there as a net addition to local income.<br><br> But most of the people filling these new jobs will have been employed beforehand at firms in the immediately adjacent area. For example, 90 percent of the workers employed at the Nissan facility in Canton, Mississippi, which opened in 2001, lived and worked in the five-county area surrounding the plant (Peavy 2007). Only 10 percent of the jobs at Nissan were filled by people who either were unemployed before the plant opened or moved to Madison County, Mississippi from more distant locations, including out of state, and only that 10 percent of the Nissan workforce properly is counted among the holders of new jobs created by the plant.<br><br> Moreover, only the difference between the wages paid at Nissan and the wages earned previously represents a net addition to local income for the 90 percent of the workers that merely changed jobs. Recognizing that the bulk of the hires at a new or expanded plant will be drawn from the ranks of the already-employed local labor force leads to the conclusion that the net increases in jobs and income usually will be much smaller than the gross increase. Even so, and often subject to little or no accountability, companies receiving generous public subsidies rarely meet the job creation or hourly wage targets promised in return.<br><br> They often pull up stakes and move their operations elsewhere when the subsidies run out. Relocation in search of bigger incentives is a tactic especially popular among 8call centers 9 and high-tech companies that employ few specialized physical assets and, thus, can easily abandon one site in favor of another (LeRoy 2005). Even in the rare case where selective incentives actually attract people from other states or cities to the local workforce, additional public services will be needed to accommodate them.<br><br> If the new company on the block has been granted relief from state and local taxes to the point where the company 9s tax bill does not cover these additional costs, the higher tax bill will fall on other existing businesses, perhaps destroying as many or more jobs as supposedly were created by the subsidy in the first place. Selective tax incentives produce other unintended consequences. In addition to encouraging substantial lobbying and rent-seeking activity as companies attempt to persuade C HAPTER 8: Q UIT P LAYING F AVORITES 121 the legislature to give a selective tax credit to them, these selective incentives create distortions in economic activity by favoring some industries at the expense of others.<br><br> Given serious doubts about the efficacy of tax incentives, why are they so popular? The answer is that businesses looking to expand their plants or to move to new locations have strong incentives to lobby for tax breaks and other subsidies that add to owners 9 profits and, moreover, encouraging a bidding war between two or more state or local governments promises to increase the value of the incentives they can extract from any one of them. Politicians interested in re-election, in turn, have strong incentives to respond to private firms 9 self-serving subsidy demands in order to take credit for enticing a high-profile company to town or to avoid blame for the jobs that would be lost if an existing employer moved to another location.<br><br> The politicians will be supported on the tax-incentive issue by other groups having immediate financial stakes in the process, including local real estate developers, investment bankers (who float public bond issues and arrange financing for the incoming firm), and economic development officials whose livelihoods depend on success in chasing after ornaments to add to the local or state economy. The special interests of subsidy-seeking private firms dominate the political process because voter-taxpayers are only weakly motivated to become informed about the costs of tax incentive programs and to organize in opposition to them. They see the jobs 8created 9 at a new plant; they do not see the jobs that are lost elsewhere in the economy as a result of the higher tax burden imposed on other businesses and as a result of the economic resources reallocated from productive activities toward lobbying government to obtain these favors.<br><br> Nor can they readily see the higher future tax bill they themselves will be required to pay in order to amortize and service the public debt issued to finance the subsidies diverted into the pockets of the owners of politically influential private companies. W HAT ARE THE E CONOMIC I MPACTS OF T ARGETED T AX I NCENTIVES ? Not surprisingly, economists have devoted considerable attention to analyzing the effects of taxes and targeted tax incentives.<br><br> The most extensive review of the literature exploring the links between fiscal policy and economic growth is contained in a 1997 article, which compiles the results of more than 90 such studies conducted in the United States (Wasylenko 1997). Many of the studies reviewed by Wasylenko, and many of those published since, attempt to determine whether interstate differences in tax policy help to explain cross-state differences in income growth, wages and industrial composition. 1 Other contributions to this literature ask whether public spending on infrastructure is growth-enhancing.<br><br> Much of this research will be discussed elsewhere in this volume. However, some of the studies reviewed by Wasylenko, plus several more recent papers, specifically investigate the impact of targeted tax policies on economic growth. These studies inform the debate over targeted tax incentives and we summarize them here.<br><br> By targeted tax incentives we mean those which are focused on a particular industry, geographical region or, in some cases, an individual firm. 1 Tax policy can influence industrial composition by causing productive resources, including labor, to move from tax-disfavored to tax-favored sectors of the economy. U NLEASHING C APITALISM 122 Two important empirical questions are at the heart of the debate over targeted tax incentives.<br><br> The first is whether or not tax incentives actually influence firms 9 location choices. The second, and perhaps more important question, is whether, in combination with firms 9 location decisions, tax incentives actually lead to improved local economic performance. We begin by noting that businesses do, in fact, seem to be responsive to state and local economic development incentives.<br><br> A review by Timothy Bartik (2002) concludes that the majority of scholars who have studied the issue find some evidence of firms 9 location decisions being influenced by incentives. More recent research on Maryland 9s Job Creation Tax Credits links employment growth to the availability of incentives, but characterizes the response as both mild and sector-specific (Sohn and Knapp 2002). One of us (Hicks 2007a) finds that tax incentives promoted entry by large retailers in California.<br><br> However, this evidence is not necessarily a cause for celebrating the usefulness of incentives as a policy tool. All of the aforementioned studies, which find business location decisions to be favorably influenced by targeted tax incentives, also conclude that the benefits to the communities that offered them were less than their costs. Figure 8.1 summarizes the results of the existing literature on targeted tax incentives, including some finding evidence that incentives had no impact or even a negative impact on the economic performance measure(s) studied by the author.<br><br> The studies range from national studies of state-level incentives, to state-level evaluations of incentives targeted at a particular industry, to a very few quasi-experimental studies of the impact of tax incentives on individual firms. Ambrosius (1989) conducted a nationwide study of economic development incentives in a time-series model of the United States. She found that such incentives did not explain economic outcomes at the state level.<br><br> Trogan (1999) built on Ambrosius 9s work, examining the growth rates of U.S. states as functions of the availability of fiscal incentives and a number of other variables unrelated to state policy initiatives. He found that favorable tax treatment for manufacturing in general, including loan programs, led to higher levels of employment, but were quite costly.<br><br> He also found, however, that firm-specific targeted incentives actually reduced state per capita incomes. Notable recent studies include Gabe and Kraybill (2002), who evaluate firm-level tax incentives on a sample of more than 350 Ohio firms. The authors asked not only whether incentives contributed to job growth, but also whether recipient firms overstated expected employment gains.<br><br> Gabe and Kraybill found no evidence that the incentives promoted employment growth (and some weak evidence that they actually reduced it). Firms receiving Ohio 9s tax incentives also overstated the number of employees they expected to add to their payrolls to a greater extent than non-recipient firms. Similarly, in a study of Maryland, Sohn and Knapp (2002) evaluated the impact of tax incentives on employment at the firm level and reported weak sector-specific positive impacts that were quite small.<br><br> Perhaps the most influential of the studies we reviewed found few local or regional impacts associated with the entry or expansion of more than 100 new large firms during the 1980s (Fox and Murray 2004). C HAPTER 8: Q UIT P LAYING F AVORITES 123 Figure 8.1: Empirical Studies of Large Firm Impacts and Tax Incentive Efficacy Study Region/Time Findings Ambrosius (1989) National study of development incentives, 1969 31985 No evidence of incentive impact on manufacturing value-added or unemployment, thus suggesting that tax incentives were ineffective. Trogan (1999) National study of state economic growth and development programs, 1979 31995 General fiscal policy found to be mildly effective, while targeted incentives reduced economic performance (as measured by per capita income).<br><br> Gabe and Kraybill (2002) 366 Ohio firms, 1993 31995 Small reduction in employment by businesses which received Ohio 9s tax incentives. Fox and Murray (2004) Panel study of impacts of entry by 109 large firms in the 1980s No evidence of large firm impacts on local economy. Edmiston (2004) Panel study of large firm entrance in Georgia, 1984 31998 Employment impact of large firms is less than gross job creation (by about 70%), and thus tax incentives are unlikely to be efficacious.<br><br> Hicks (2004) Panel study of gaming casinos in 15 counties (matched to 15 non-gambling counties) No employment or income impacts associated with the opening of a large gambling facility. There is significant employment adjustment across industries. LaFaive and Hicks (2005) Panel study of Michigan 9s MEGA tax incentives, 1995 32004 Tax incentives had no impact on targeted industries (wholesale and manufacturing), but did lead to a transient increase in construction employment at the cost of roughly $125,000 per job.<br><br> Hicks (2007a) Panel study of California 9s EDA grants to Wal-Mart in the 1990s The receipt of a grant did increase the likelihood that Wal-Mart would locate within a county (about $1.2 million generated a 1% increase in the probability a county would receive a new Wal-Mart), but this had no effect on retail employment overall. Hicks (2007b) Panel study of entry by large retailer (Cabela 9s) No permanent employment increase across a quasi-experimental panel of all Cabela 9s stores from 1998 to 2003. U NLEASHING C APITALISM 124 Hicks (2004, 2007a, b) explored the impact of gambling and retail establishments, respectively, on regional economic performance.<br><br> He found large intra-county adjustments in the composition of industries, but no net increase in economic growth. In the case of retailing (Cabela 9s, the nation 9s largest marketer of outdoor sporting goods), Hicks found a modest, but transient growth effect that dissipated over one quarter. Edmiston (2004) concludes that the economic impact of new large firms is almost always overstated, with ex post multipliers frequently less than one.<br><br> He argues that this finding casts considerable doubt on the efficacy of local tax incentives designed to influence the location decisions of firms. 2 LaFaive and Hicks (2005) examined all of Michigan 9s targeted incentives for manufacturing and wholesaling firms, from 1995 to 2004, under the Michigan Economic Growth Authority (MEGA) grant program. The authors found no programmatic impact either on overall economic performance or on employment in the targeted manufacturing and wholesaling sectors.<br><br> On the other hand, LaFaive and Hicks did find that the incentives increased construction employment modestly in the affected counties, but did so at a very high cost: the impact was roughly one new construction job per $125,000 of annual MEGA spending. In Figure 8.1 9s final entry, (Hicks 2007b) studied California 9s oft-criticized incentives to Wal-Mart. Using a panel of California counties from 1990 to 2004, he finds that the tax incentives increased the probability of Wal-Mart opening new stores, but that Wal-Mart 9s entry was not associated with overall increases in county-level employment.<br><br> The literature summarized above, which comprises all of the peer-reviewed academic research of which we are aware, examines the local impact of targeted tax incentives from a purely empirical point of view. Other studies (not assessed in detail here) find that the location decisions of firms may be influenced by the offer of a local tax incentive. However, as with those we have cited, all of them concur forcefully with the conclusion that targeted tax incentives do not provide local economic benefits outweighing their economic costs.<br><br> What, then, has been West Virginia 9s experience with targeted tax incentives? T AX I NCENTIVES IN W EST V IRGINIA West Virginia has a long history of offering tax incentives for specific firms and industries. The generally poor performance of the state 9s economy provides abundant anecdotal evidence that these incentives have not been effective in stimulating economic development.<br><br> 3 These shortcomings were widely recognized and the State Department of Tax and Revenue performed a self-study of tax incentives in 2002 at the request of then-Governor Bob Wise. The 2002 study identified 22 existing targeted tax credits. After comparing the values and types of incentives offered by West Virginia with those of other states, the Department of 2 It should also lead policymakers to question the multipliers so commonly applied or assumed in economic impact studies.<br><br> In West Virginia, for instance, it is not uncommon for economic development officials to claim multiplier effects as high as seven for new firm entry. 3 Nor have they been effective in equally poor Mississippi. Mississippi has had an incentive program in place since the 1930s 4the first such program in the nation.<br><br> Originally known as Balance Agriculture with Industry (BAWI), the program was intended to promote diversification of the state 9s economy by enticing manufacturing firms to relocate to Mississippi from high-wage northern states. See Cobb (1993) for an in-depth analysis of BAWI 9s few modest success stories as well as its many failures. C HAPTER 8: Q UIT P LAYING F AVORITES 125 Tax and Revenue made detailed recommendations.<br><br> Among these were recommendations to eliminate 11 programs, revamp three and leave eight unchanged. The study further recommended the introduction of two new incentives. The study 9s authors did not address the question of whether the tax incentives actually contributed to improved economic performance; their only concern was whether or not the incentives achieved the goals set out in pertinent authorizing legislation, such as the number of claimant firms and gross job creation by recipients of the incentives.<br><br> Among the programs targeted for termination were tax incentives for the aerospace sector and security tax credits for convenience stores. Neither of these incentives had ever been taken advantage of: in the three years of its existence, the aerospace sector credit had not been claimed; nor, after four years of availability, had the convenience store security credit. A coal-loading facility tax credit was among the eight incentives the Department of Tax and Revenue recommended be continued.<br><br> In the decade prior to the study, roughly $500,000 in such credits had been claimed every year. This level of use led the study 9s authors to conclude that the incentive has been effective. Three incentive programs were also found to have been successful (again by the criteria of use and claimed effectiveness, not actual economic performance), but to warrant modification.<br><br> These were the Business Investment and Jobs Expansion Credit ( 8Supercredit 9) , the Industrial Expansion and Revitalization Credit and the Research and Development Projects Credit (R&D) , all of which provide tax relief for qualifying firms. The modifications recommended for each of these programs were designed to reduce administrative costs, to make the tax credits available to more types of businesses (especially small firms), and to reduce the complexity of the application process. Of these programs, the Supercredit incentive is the largest, but the most complicated.<br><br> Indeed, given that it required claimants to complete and file a 16-page form, the study 9s authors called Supercredit the most complex tax incentive in the nation. However, the program also has been popular. Credits as high as $60 million were claimed in some of the program 9s early years, according to the Department of Tax and Revenue, which deemed it have been successful insofar as the participating firms reported that they had used the credits to add more than 9,000 workers to their payrolls.<br><br> 4 Roughly $206 million in Industrial Expansion and Revitalization credits and $16.8 million in Research and Development Projects credits were claimed over the decade preceding the Department of Tax and Revenue 9s self-study. Two new tax incentives were proposed. The first exempted items purchased for use in qualifying R&D projects from state sales and use taxes, while the second exempted venture capital firms from the business franchise tax.<br><br> Virtually all of the Department of Tax and Revenue 9s recommendations subsequently were approved by the state legislature. Sunsets for five of the 11 programs recommended for termination were scheduled; six others were shut down. The reforms designed to streamline the application process and to expand participation in the state 9s three largest incentive programs, the previously mentioned Supercredit and the Industrial Expansion and Revitalization and Research and Development Projects credits, were adopted.<br><br> These three credits, along with two of the programs the 2002 self-study recommended be continued 4 Interestingly, however, the total amount of Supercredit claimed by the program 9s participants has exceeded their collective tax liability in some years. In 1997, for example, participating firms claimed over $43 million in credits, but owed taxes that should have warranted only $2.6 million in Supercredit benefits. U NLEASHING C APITALISM 126 without modification, account for approximately 85 percent of the selective incentives the state grants each year, which totaled about $70 million in 2003, according to the Department of Tax and Revenue.<br><br> The business franchise tax exemption for venture capital firms accounts for perhaps another 10 percent; less than $1 million in incentives typically is claimed annually under the eight other programs that remain active in West Virginia. In 2002, the legislature dramatically altered the mechanisms for incentivizing businesses to relocate to the state. Near the end of the legislative session, a West Virginia Economic Development Grant Committee was created, with authority to distribute roughly $250 million in lottery-revenue-backed bonds to finance a one-time economic development effort.<br><br> The legislation required the governor to appoint a commission to review proposals submitted by any entity. Several hundred proposals were considered and 47 specific grants ultimately were made to applicants ranging from city and county governments to individual firms. The largest grant, to Ohio County, provided $35 million for the purpose of establishing a business-and-technology park to be occupied primarily by a Cabela 9s sporting goods store.<br><br> The smallest grant the committee approved ($100,000) was for the purchase of a rail spur by Putman County for conversion to a hiking trail. 5 The process did not escape criticism and, following a decision by the state Supreme Court that the bill authorizing the Economic Development Grant Committee represented an unconstitutional delegation of legislative power, a special session of the legislature was called to rewrite the original law. The statutory language was amended so as to comply with the Court 9s ruling; by the end of 2006, more than half of the 47 grants approved by the committee had been funded.<br><br> Today, West Virginia offers economic development incentives under 14 active programs. A schedule for funding the remaining grants approved by the governor 9s Economic Development Committee is in place. In the next section, we ask two questions: how have the grants been distributed geographically and, what is perhaps more important, what has been their economic impact?<br><br> T HE D ISTRIBUTION AND I MPACTS OF W EST V IRGINIA 9 S E CONOMIC D EVELOPMENT G RANTS The geographic distribution of West Virginia 9s economic development grants is highly skewed. About 85 percent of the 47 grant proposals approved by the governor 9s committee went to projects in just five counties. More than half (29) of the state 9s 55 counties received no grants, and per capita spending in the counties ranged from zero to just over $1,200 per citizen.<br><br> In an effort to determine whether regional variation in economic performance may have influenced the grant-approval process, we performed statistical tests (not reported here) that related the amount of grant monies received by a county to the county 9s pre-grant rate of economic growth (controlling for population). We found no statistically significant correlation between the two variables: counties exhibiting slower rates of growth were no more likely to be recipients of economic development grants than their counterparts that were 5 Other projects financed by these grants include funding for academic and research facilities at West Virginia University and Marshall University and the construction of a new high school in Jefferson County. C HAPTER 8: Q UIT P LAYING F AVORITES 127 growing faster prior to the program 9s implementation.<br><br> It thus appears that the grants were not targeted at counties in greatest need of economic development assistance. This is neither approbation nor censure of the process, simply an observation. It simply suggests that the regional disparities in grant funding cannot be explained by cross-county differences in economic growth rates.<br><br> 6 Be that as it may, the most salient question raised by West Virginia 9s grant program is whether it has had observable effects on economic development outcomes. It is too early, as of this writing, to conduct the careful economic and statistical analysis necessary to fully evaluate the impact of the grants. Such a study would control for the timing of each grant, holding constant other factors, such as baseline economic conditions and unrelated economic development policies, which determine a county 9s rate of growth independent of the grant process.<br><br> However, one specific grant approved by the governor 9s committee does provide fertile ground for a preliminary analysis of the program 9s effectiveness. As mentioned above, the economic development grant to Ohio County was used to finance the construction of a retail mall designed for occupancy by a new Cabela 9s outdoor sporting goods store. In addition to the $35 million grant awarded to the county, public funds were made available for infrastructure improvements at the site, including highway off-ramp construction.<br><br> A number of other incentives were provided to the retailer. The total value of the subsidies to Cabela 9s has been estimated to be as high as $120 million (see Hicks 2007b). Our attempt to assess the impact of the spending on the local Ohio County economy is guided in part by a forthcoming study of all existing Cabela 9s retail stores over the period from 1998 through 2003 (Hicks 2007b).<br><br> The study finds no persistent employment impacts on the counties in which the outlets were located. Although the Cabela 9s in Ohio County was not included in the analysis, since it had not yet been built, it is nevertheless possible to apply the methods of the forthcoming study to shed some light on the impact of the rather sizeable incentives provided to the retailer to locate in West Virginia. The announcement in 2003 that a new Cabela 9s was coming to Ohio County augured the creation of 1,200 jobs (West Virginia Development Office 2003).<br><br> The retailer opened its doors in August of 2004. Two years later, Ohio County 9s economy showed little evidence that the promise had been fulfilled (see Figure 8.2 on the following page). From August 2004 to August 2006, 700 workers were added to the county 9s employment rolls.<br><br> 7 This addition to the local workforce translates into an employment growth rate that is identical to the West Virginia state average over the same time period (roughly 1.68 percent per year). Similarly, Ohio County 9s unemployment rate rose by 0.5 percent from August 2004 to August 2006, compared with an increase of 0.6 percent for the state as a whole. 6 A more complete 8public choice 9 analysis of the grant-approval process would include political variables, such as whether a county was represented on the Economic Development Grant Committee or by members of key legislative committees having oversight responsibilities with respect to the grant program.<br><br> 7 This evidence is consistent with Peavy (2007), who finds that the net increase in employment in the five-county area surrounding Mississippi 9s Nissan plant has been far less than the number of workers actually employed at the new facility. He calls this a 8displaced worker effect. 9 U NLEASHING C APITALISM 128 Figure 8.2: Ohio County West Virginia, Employment and Unemployment Rate (NSA) 0 5,000 10,000 15,000 20,000 25,000 30,000 1990 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2001 2002 2003 2004 2005 2006 Year Employment 0 2 4 6 8 10 12 Unemployment Rate Employment Unemployment Rate Note: Data not seasonally adjusted. Source: Bureau of Labor Statistics.<br><br> Thus, in employment terms, the economic performance of Ohio County has not differed markedly from the state average following the Economic Development Grant Committee 9s $35 million investment in Cabela 9s. Despite being among the largest of the committee 9s grants, the initial evidence suggests that the incentives offered to the retailer have not delivered the promised benefits. To be fair, it is possible that job growth in Ohio County, though modest and essentially identical to that of the state as a whole, would have been slower in the absence of the incentive package.<br><br> It is simply too early to perform the careful economic study necessary to assess the effectiveness of this and other economic development grants. However, even if the grant to Ohio County was shown to be responsible for all of the net job creation there (and this would be very unlikely given the many other factors that contribute to economic growth), then the efficacy of the public 9s investment would still be questionable. The cost per job for the roughly 700 people added to payrolls in Ohio County ranges from just under $50,000 to more than $170,000.<br><br> S UMMARY AND P OLICY R ECOMMENDATIONS Targeted tax incentives are a frequently used economic development policy tool. Given that they are widely offered, it is difficult to fault private firms either for asking or accepting C HAPTER 8: Q UIT P LAYING F AVORITES 129 subsidies from state and local governments. After all, depending on the structure of the incentives made available in any particular case, the owners of subsidy-recipient firms stand to profit through a lowering of their tax bills or by shifting some of the costs of building and operating their businesses to other taxpayers.<br><br> The politicians and economic development officials who grant selective incentives benefit in turn by being able to take credit for luring trophy companies to an area, supposedly bringing all of the blessings of more robust growth: new jobs, higher incomes, more tax revenue and a better quality of life. There is, however, little evidence that targeted tax incentives produce benefits that exceed their economic costs. Even on the occasions when scholars have found selective incentives influenced business location choices, the cost per net job created has turned out to be extraordinarily high.<br><br> The fact of the matter is that selective incentives benefit the firms receiving them at the expense of existing firms, who lose some of their employees to higher paying jobs and who face higher tax bills to help finance the subsidies granted to the favored newcomer. Targeted tax incentives are a 8business-friendly 9 public policy 4friendly to the firms receiving what amounts to corporate welfare 4but they are not 8market-friendly. 9 When governments offer selective tax incentives and economic development grants firms are encouraged to reallocate their resources away from production and into securing them, and to lobby for the extension of these programs to other firms and industries. In the terminology of Chapter 3, these policies increase the reward to 8unproductive entrepreneurship 9 and lower prosperity as a result.<br><br> They are tools of central economic planning, in which the political process is substituted for the market process in driving resource allocation decisions. Politicians often enact these incentives in an attempt to encourage investment in a particular industry they believe to be worthwhile. But as the discussion of 8wrong predictions 9 in Chapter 3 illustrated, there is simply no way central planners can predict which industries or businesses will be profitable in the future.<br><br> Instead, these opportunities must be discovered within the marketplace, through the decentralized decisions of entrepreneurs and the private investors who are always eager and willing to fund profitable new ventures. These private sector decision makers are forced by the harsh realities of a competitive marketplace to consider the true costs and benefits of additional investment in a particular business or industry. Selective tax incentives and economic development grants result in a misallocation of resources and a lower economic return from capital investment in West Virginia.<br><br> They result in distortions to market prices, and to the profit and loss signals they generate. It is not a function of government to create jobs. Paraphrasing Paul Johnson (1991, 142 & 156), government 9s function is to facilitate the creation of wealth in the private sector by providing the basic infrastructure that underpins capitalism 4the enforcement of contracts and property rights, and a limited set of public goods 4while leaving the rest to individual initiative.<br><br> Because the state is a poor substitute for private investors, it should restrict itself to these limited tasks rather than trying to single out a few industrial or retail champions for special treatment. West Virginia 9s economic development can best be fostered by eliminating these programs and adopting market-friendly policies, such as broad-based tax and regulatory relief that provide advantages to every business in the state, and reduce the need to use these incentives to attract businesses in the first place. If policymakers resist succumbing to the false promises of targeted tax incentives, they will succeed in UNLEASHING CAPITALISM .<br><br> West Virginia 9s economy will grow and prosper as a result. U NLEASHING C APITALISM 130 R EFERENCES Bartik, Timothy J. 2002.<br><br> Evaluating the Impacts of Local Economic Development Policies on Local Economic Outcomes: What has been Done and What is Doable? Upjohn Institute Staff Working Paper No. 03-89.<br><br> Kalamazoo: W.E. Upjohn Institute for Employment Research. Cobb, James C.<br><br> 1993. The Selling of the South: The Southern Crusade for Industrial Development, 1936-1990 , 2nd ed. Urbana: University of Illinois Press.<br><br> Edmiston, Kelly D. 2004. The Net Effects of Large Plant Locations and Expansions on County Employment.<br><br> Journal of Regional Science 44(2): 289-319. Fox, William F., and Matthew Murray. 2004.<br><br> Do Economic Effects Justify the Use of Fiscal Incentives? Southern Economic Journal 71(1): 78-92. Gabe, Todd M., and David S.<br><br> Kraybill. 2002. The Effect of State Economic Development Incentives on Employment Growth of Establishments.<br><br> Journal of Regional Science 42(4): 703-730. Hicks, Michael J. 2003.<br><br> A Quasi-Experimental Estimate of the Impact of Casino Gambling on the Regional Economy. Proceedings of the 93 rd Annual Meeting of the National Tax Association . Hicks, Michael J.<br><br> 2007a. The Local Economic Impact of Wal-Mart . New York: Cambria Press.<br><br> Hicks, Michael J. 2007b. A Quasi-Experimental Test of Large Retail Stores 9 Impacts on Regional Labor Markets: The Case of Cabela 9s Retail Outlets.<br><br> Journal of Regional Analysis and Policy , forthcoming. Johnson, Paul. 1991.<br><br> Modern Times: The World from the Twenties to the Nineties , rev. ed. New York: HarperCollins.<br><br> LeRoy, Greg. 2005. The Great American Jobs Scam: Corporate Tax Dodging and the Myth of Job Creation .<br><br> San Francisco: Berrett-Koehler. Peavy, John Patrick. 2007.<br><br> A Comparison of Two Alternative Models of Economic Impact: A Case Study of the Mississippi Nissan Plant . Unpublished Ph.D. dissertation, University of Mississippi.<br><br> Sohn, Jungyul, and Gerrit-Jan Knapp. 2002. Does Job Creation Tax Credit Program in Maryland Induce Spatial Employment Growth or Redistribution?<br><br> College Park: National Center for Smart Growth. Wasylenko, Michael. 1997.<br><br> Taxation and Economic Development: The State of the Economic Literature. New England Economic Review (March/April): 38-52. West Virginia Department of Tax and Revenue.<br><br> 2002. Analysis and Recommendations for West Virginia Tax Incentives . Charleston: West Virginia Department of Tax and Revenue.<br><br> West Virginia Development Office. 2003. West Virginia Economic Development Grant Committee Report.<br><br> Charleston: West Virginia Development Office. Online: http://www.wveda.org/program-grantrecipient.html (cited: December 19, 2006). <br><br>