Business incentives are ineffective and wasteful, so why are they still a thing?

A new $440 million wood products manufacturing facility might be built in Northeastern Minnesota. But unlike most businesses that are built thoroughly by private efforts, 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 (DEED), through the Minnesota Investment Fund (MIF), provides grants in order to attract new businesses into Minnesota or help existing businesses expand. The argument for these initiatives is to 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 how much money Minnesota spends on these development incentives, it is important to analyze whether these efforts garner the results intended. And the data shows that development incentives are largely ineffective and wasteful.

One good example is the wood plant proposed years ago that was not built despite IRRB approving $36 funding for it. Instead, the parent company decided to invest in its Canadian facility. But even among businesses that have managed to use grants given by DEED, the results are overblown and oftentimes 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, a lot of evidence exists showing that incentives do not significantly impact decisions of where businesses ultimately choose to invest. 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 this grant was unnecessary.

Research evidence exists detailing just how few benefits development incentives bring, if at all any. Even a 2018 report by the Office of the Legislative Auditor revealed issues with the Minnesota Investment Fund that point to a huge waste of taxpayers’ money.

The fact that these development incentives are still going on is puzzling.