Business incentives are ineffective and wasteful, so why are they still a thing?
A new $440 million wood product manufacturing facility might be built in Northeastern Minnesota. However, unlike most businesses, this one will use the help of taxpayers’ money.
The Iron Range Resources and Rehabilitation Board (IRRRB) — made up of state legislators from across the seven-county northeastern Minnesota region — voted unanimously Monday to approve a $15 million forgivable loan to the company to help build the new plant in Cohasset, just a few miles west of Grand Rapids.
The project is contingent on an additional $20 million investment from a second state agency, the Department of Employment and Economic Development.
Every year, the Department of Employment and Economic Development (DEED), through the Minnesota Investment Fund (MIF), provides grants to new and expanding businesses in Minnesota, to, as argued, induce job creation where it wouldn’t otherwise happen.
DEED also provides financial incentives through other programs, like the Job Creation Fund. Just law week, DEED awarded $625,000 — $175,000 from the Job Creation Fund and $450,000 from the MIF — to Silk Road Medical to create 67 jobs in Minnesota over the next two years.
Given the significant amount of money Minnesota spends on these development incentives, it is essential to evaluate whether these efforts yield the intended results. So, do these grants yield results? The data show that development incentives are largely ineffective and wasteful.
Often, companies may decide to move despite grant money. But even among businesses that have received DEED grants, the results are overblown and/or nonexistent.
Companies consider numerous factors when choosing locations
As the MPR article explains,
Huber president Brian Carlson said the company considered a number of factors in searching for a site for its new facility, which he said will help the company meet growing demand fueled by the “pandemic-induced housing boom.”
The company ultimately decided on northern Minnesota because of its “fiber basket, long history in the OSB industry and the quality of the workforce.”
Indeed, prevailing evidence suggests that incentives do not significantly impact business location decisions. And to the extent that grants influence businesses, localities providing the grant rarely benefit from businesses locating in their areas.
As explained by the Brookings Institution,
Research suggests that at least 75% of the time, typical incentives do not affect a business’s decision on where to locate and create jobs—they’re all cost and no benefit. Furthermore, even when incentives do tip a location decision, they do not pay for themselves. They may create new jobs, but frequently they also bring in new workers from outside the city or state, which raises costs to public services that offset at least 90% of any increased revenue.
According to the DEED announcement, Silk Road Medical, for example,
has chosen to expand in Minnesota to leverage the local talent pool of aspiring and experienced med-tech professionals.”
So to some extent, there is a possibility that this grant was unnecessary.
Indeed, research suggests development incentives bring few benefits, if any. A 2018 report by the Office of the Legislative Auditor revealed multiple issues with the Minnesota Investment Fund, suggesting that the fund could be a waste of taxpayers’ money.
Given the evidence, it is puzzling, to say the least, that such incentives remain popular.