Criticizing business subsidies in local economic development has
become a popular pastime for the media and others (including the
Minneapolis Fed). Often missing from the discussion, however, is
any attempt to set parameters around what isand importantly,
is notconsidered a subsidy.
For the purposes of the fedgazette articles in this
issue, public spending on economic development is not considered
a subsidy when it provides some "public good" (like roads, education,
safety and other community infrastructure) and the direct benefits
of this spending are nonpreferential, or widely available to all
On the flip side, public spending on economic development is a
subsidy when public resources are spent in a preferential mannerthat
is, given to specific companies rather than being widely available
Even this seemingly clear-cut definition has many pitfalls. For
example, many programs have overtly social or environmental goals
at their core. Such programs were not included in the analysis contained
in these articles, nor were a wide range of enhancement programs
targeting farming operations.
This and other qualifications expose an expansive gray area regarding
business subsidies, some of which is a matter of necessity. Regardless
of how clearly one defines business subsidies, providing the reader
with comprehensive data on the subject is difficult due to the sheer
breadth and complexity of hundreds of economic development programs
and the fact that little reporting is required of them (particularly
As such, generalizations are necessary to keep readers from drowning
in the pit of minutia and focused on the big picture. But the trade-off
in sacrificing a clear subsidy parameter is a blanket charge that
all economic development programs are nothing more than corporate
giveaways in disguise. Clearly, some programs subsidize business,
while others do not, at least not directly. Most coverage of this
issue, however, glosses over such distractions.
Below is a brief description of common economic development programs
that provide the base for many individualized efforts, and an explanation
of where they lie on the subsidy-or-not-a-subsidy continuum. Ultimately,
the intention here is not necessarily to dictate where the subsidy
line should be drawn, but to give fedgazette readers
an editorial reference point as they read the articles in this issue.
Nonpreferential, "public good" economic development
Most any public works or infrastructure program fits this mold
because annual public expenditures on roads, sewers, parks, airports
and the like are considered to produce public goods that benefit
Some economic development programsmostly at the state and
federal levelalso provide public resources explicitly for
community infrastructure. The federal Community Development Block
Grant (CDBG) Program, for example, doles out billions to states
every year, who pass the money on to local communities for physical
and social infrastructure projects.
In many cases, this investment is a precursor to business development.
For example, communities use grants and other funding to improve
industrial parks to attract new businesses. Such spending is not
considered a business subsidy because the resources were used to
create public infrastructure and did not benefit a specific company
at the time of the investment.
Preferential subsidies to businesses
Business subsidies are clearly evident in a number of economic
development tools and programs that offset various business costs
and provide no obvious public good in return.
Tax credits and abatements, for example, forgive a business certain
portions of its annual tax liabilitytypically either property
and/or income taxes. The Michigan Economic Growth Authority (MEGA)
awards credits to businesses against the state's single business
tax. Sometimes, a particular program might encompass a stable of
different tax credits. Michigan's Renaissance Zone Program waives
upwards of a half-dozen major state and local taxes.
Grant programsmostly from state and federal governmentsprovide
businesses one-time money for everything from equipment or land
purchase, or to write-down the costs of site and plant improvements.
The vast "gray area" of business subsidies
Unfortunately or convenientlytake your pickmost economic
development programs do not fit neatly inside or outside the box
of business subsidies. Given wide-ranging missions, eligibility
requirements and resources, many programs are able to sidestep any
obvious charge of giving away the public farm to businesses.
Public loans to businesses, for example, appear on the surface
to be widely available to all businesses, but generally benefit
only a small number of businesses that cannot get financing through
a commercial bank, or cannot afford commercial interest rates. Being
quasi-preferential, such loans also subsidize business by using
public dollars to write-down the cost of capital.
The biggest dog on this block is the federal Small Business Administration,
but low-cost loan programs are available through several other federal
agencies. Each state also has its own cadre of loan programs, and
hundreds of revolving loan funds at the local level provide below-market
rate financing to businesses in need of capital.
Some grant programs also have one foot in and one foot out of
the business subsidy box. Oftentimes, federal and state grants are
funneled to local development organizations, which use the grant
money for public infrastructure projects, business assistance programs
and organizational operations. Most revolving loan funds, for instance,
are initially capitalized by state and federal grants. The king
of gray, however, is tax increment financing (TIF), a tool widely
used in Minnesota, Wisconsin, and to a lesser extent in all Ninth
District states. (See detailed discussion
of TIF.) TIF creates very obvious public goodstypically
new roads and sewersyet also redirects an enormous amount
of public money that benefits a comparatively small handful of businesses.