Subsidizing Exports Will Do More Harm Than Good for Missouri
China already imports free-market
policy analysts from Missouri.
State lawmakers want to turn Saint Louis into an international cargo hub. Sounds great, right? Who wouldn’t want that?
Unsurprisingly, state lawmakers decided to do this by providing millions in tax incentives to private companies. They want to give up to $60 million in tax credits to companies that export by air from Missouri, and $420 million in incentives toward the construction of storage facilities. My colleague Audrey Spalding already argued that this policy would subsidize the construction of warehouses abroad, and that trade will occur independent of government intervention. Essentially, we’re paying our trading partners to buy our products.
In this post, I will introduce some additional arguments against using taxpayer monies to boost foreign exports. Don’t get me wrong; I am an enthusiastic supporter of foreign trade. (And, as it turns out, 90.1 percent of economists agree with me on this.) I just disagree that taxpayers should be forced to pay for it.
The air hub would benefit some groups in the Saint Louis area, but taxpayers throughout Missouri have to pay for it.
People living in Saint Louis will receive more of the benefits, but the other taxpayers in Missouri will have to help shoulder the cost. A taxpayer in Joplin or Sedalia will pay proportionately the same as a taxpayer in Saint Louis, despite the fact that he doesn’t directly benefit from the policy. This is an unfortunate case of concentrated benefits and diffused costs, a phenomenon I have described before on the blog.
Tax Credits in Missouri are already out of control.
From 1998 to 2010, tax credit redemptions have grown from $102.7 million to $521.5 million, and they’re continuing to grow. At the same time, state revenues are falling. This is not sustainable in the long-term. Both the Tax Credit Review Commission and the state auditor’s office have recommended changes that would limit tax credits, but so far lawmakers have adopted none. I wish that lawmakers in Missouri would implement measures that limit — not expand — tax credits in Missouri.
Other government services compete for these funds.
Because Missouri is strapped for funds, lawmakers have made cuts to education and public safety in the state budget. Does this indicate that they believe being an export hub is a higher priority than education or public safety?
The subsidy steals activity from one location in order to give it to another, and will lead to an interstate bidding war.
The purpose of this bill is to steer cargo away from other cities, particularly Chicago. The bill’s sponsor, Sen. Eric Schmitt, recently said this in an article in the Saint Louis Beacon. From the perspective of a state legislator, this make sense. They want to get reelected, so they will focus on projects that are large and very visible to voters. However, the policy makes Illinois worse off because it causes businesses to leave the area.
Once enough companies leave Illinois to come to Missouri, it’s only a matter of time before Illinois retaliates by providing its own set of incentives to lure them back. We see this in the auto industry, in particular. As a result, targeted tax credit programs encourage states to engage in a bidding war. This is a problem because taxpayers are left to pick up the tab. Even though subsidies don’t create new economic activity (they merely shift it from one location to another), taxpayers are forced to devote increasing amounts of their tax monies toward attracting businesses and industries. They’re paying more, but they’re not getting more.
Local economies would be wise to stop viewing each other with antagonism. Saint Louis would be better off if it focused on its comparative advantage and let exporting activity stay in Chicago.