States should learn from business subsidy disappointments and end corporate welfare

Florida’s state government is suing Planet Hollywood, arguing that it paid the company to create jobs that never appeared and it wants its money back. Clawbacks such as this one are a regular feature of state deals with companies, and states tend to get repaid without court intervention. The bigger question is why state lawmakers around the country think they need to offer corporate handouts in the first place.

Florida offered Planet Hollywood $288,000 in taxpayer money in 2011 to create 90 jobs, and it alleges the company didn’t comply with monitoring or reporting requirements to ensure that it kept up its end of the bargain. Without confirmation that the company actually created the jobs it promised, the state wants the taxpayer money back. Planet Hollywood’s parent company has said it plans to address the situation after it meets with the Department of Economic Opportunity in coming weeks.

Public administrators often put strings upon state business handouts and ask for their money back when companies don’t do what they ask. It’s an attempt to make sure that the state doesn’t give out money for nothing.

But administrators also can play games with clawbacks. They often announce that a company is going to create 100 jobs, but put in requirements to create fewer than that. And if companies don’t meet even the smaller job requirements, administrators often amend the deals to allow companies to keep qualifying. In Michigan’s primary business subsidy program, 74 percent of amendments to deals were to lower a performance threshold. 

States can lose money regardless of whether clawbacks occur. Whenever money changes hands and a company stops operating, there tends to be a long line of people who want their money back. States only get a good spot in that line when the company owes back taxes, and taxpayer support doesn’t count as back taxes.

States often gamble on high-risk, speculative businesses, too. They call it “investing in the future.” It’s rare when it pays off, and administrators know that the handouts are unlikely to create jobs or be returned. 

Still, clawbacks exist to address the concern that business subsidies will be wasted if they are not based on performance. Yet the entire business of awarding favors to select companies is wasted when the programs do not increase the state’s overall economic performance, which is the goal of the people who create them.

When corporate handouts cannot perform their basic function, adding job requirements to them is a fig leaf slapped onto a statue that is entirely risqué. 

During the year that Florida extended Planet Hollywood its subsidy, state administrators also pledged a further $71.7 million in 121 other deals to create 13,558 jobs. Not all of the jobs announced were created; otherwise, the state wouldn’t be in court. In fact, it’s quite common that companies don’t live up to expectations. According to state reports, 64 percent of all deals fall apart, with most of them being torn up before money changes hands. Of the projects that actually happen, only 40 percent of job announcements turn into actual jobs. 

Even if job announcements turned into actual jobs, it still would represent a fraction of jobs created in Florida. The economy moves a lot faster than is appreciated, especially by state politicians. Entrepreneurs and business managers are constantly adding and shedding jobs without asking for permission. According to the Bureau of Labor Statistics, over the same period that Florida made deals to create 13,558 jobs, it lost 1,555,400 jobs and added 1,719,300. If residents had to rely on state government to replace the jobs lost in the natural course of the economy, administrators would be able to find a replacement for only one out of a hundred, and the promised jobs they found would be unlikely to materialize.

In other words, states’ corporate handouts do not have sufficient power to do the things that politicians say they do. 

Florida reined in some of its discretionary payments in 2017. Then-House Speaker Richard Corcoran lambasted selective incentive programs and was able to stop the budget authorization for one state program. Coincidentally, Planet Hollywood’s deal was from that program. 

Select subsidies provide a narrative that lawmakers are doing something about jobs. A project can be a symbol that the state is winning the fight for jobs, regardless of whether job growth there lags the region. It can be a sign that the state is modernizing its workforce, even if job openings are in more conventional industries. Subsidies provide anecdotes about performance instead of deliver gains to the economy. They provide a political function in lieu of substantive economic effects.

Which is why they are a waste of time, money and effort for people who actually care about growing the economy. Lawmakers around the country ought to be eliminating them instead of trying to recuperate lost funds.

James M. Hohman is director of fiscal policy at Mackinac Center for Public Policy, a research and educational institute located in Midland, Mich. Follow him on Twitter @JamesHohman.