If you need a reminder regarding the negative consequences of economic development incentives, look no further than this paper published by the Mercatus Center at George Mason University. This all-encompassing paper lays out the many reasons these incentives don’t work. The authors then propose a solution that may ring a bell to those in Kansas City: an interstate compact. Though it’s not an interstate compact per se, the evidence in this paper supports the theory behind the border truce (last year, Missouri and Kansas leaders agreed to a truce in the economic development subsidy arms race) between Kansas and Missouri. The authors argue that the truce could do more for economic growth than all the incentives combined (if it’s actually followed, of course).
The evidence against economic development subsidies (which this paper defines as “any government-granted privilege that creates exclusive economic benefits for its recipient(s)”) is stacking up. Research shows that subsidies may benefit the specific firm or industry that receives the privilege, but most subsidies don’t result in any measurable improvements in the broader communities that pay for them. In fact, they may reduce economic development in the broader community if states fund them with tax increases or reduced spending on public services, two things that drive away economic development. There’s also little evidence that economic development subsidies sway a company’s decisions to relocate or expand.
So why do policymakers still give out these subsidies?
The paper identifies a few reasons, but one seems particularly relevant to Kansas City’s situation: Policymakers feel pressure and may view it as politically advantageous to offer subsidies if surrounding states are also offering them. This seems to be a driving force in the Kansas–Missouri border war; each subsidy offered by Kansas policymakers encouraged policymakers in Missouri to offer one, and vice versa. As the paper points out, “[between] 2011 and 2018, Kansas and Missouri paid a combined $335 million to subsidize the relocation of around 12,000 jobs from one state to the other, with most companies moving only five to seven miles.”
These researchers propose an interstate compact as a solution, the specifics of which can be found in the paper. The current truce between Kansas and Missouri is a small step in the right direction, in theory. But in practice, it has numerous problems and hasn’t produced the hoped-for results. If lawmakers are serious about ending wasteful economic development incentives and promoting economic growth, they should take some notes from this Mercatus paper and truly end the border war for good.
