Should Taxpayers Subsidize Chocolate Making?

I testified yesterday before the House Finance Committee about how government-directed “economic development” hampers economic growth.

A prime example of this happened Tuesday, where taxpayers forked over more than $2 million dollars for the Hershey Company to expand a chocolate-making factory. While ribbon-cutting ceremonies make for good photo ops, the effects of distorting the market and playing favorites are not immediately seen. But these unseen costs outweigh any visible benefits to Pennsylvania’s economy as a whole.

Targeted tax breaks and corporate welfare subsidies prevent across-the-board tax rate reductions that would benefit all Pennsylvanians, which are better at attracting new businesses from all sectors, and allowing existing businesses to expand in Pennsylvania.

Of course, Pennsylvania has felt the need to do this because of inhospitable business climate, including the highest flat corporate income tax in the United States and the 10th highest state and local tax burden in the country. Addressing these problems and making Pennsylvania more business-friendly would significantly reduce the need for such corporate welfare. Until this happens, Pennsylvania is merely renting jobs with its economic development spending.

As the table below illustrates, over the last six years, the commonwealth out-spent every state in the country on “economic development,” according to data collected by the Council for Community and Economic Research. However, there is no evidence that states utilizing more direct subsidies and tax credits better stimulated their economies. From 2002 to 2012, the top 10 states—which spent the most on economic development—actually experienced worse job growth than the bottom 10 spending states.

Table 1. Expenditures on Economic Development Programs
Top Ten States
States Total FY 2007-12 Per-Capita Job Growth FY 2002-12
Pennsylvania $4,293,743,000 $337 0.43%
California $3,988,431,000 $106 -2.28%
Ohio $3,899,052,173 $338 -5.63%
Virginia $2,919,261,464 $361 5.59%
Florida $2,704,340,866 $142 -1.19%
Louisiana $2,322,675,818 $508 1.16%
New Jersey $2,244,215,000 $254 -2.28%
Arkansas $1,985,194,000 $676 0.36%
Texas $1,832,358,565 $71 12.06%
New York $1,678,794,570 $86 2.93%
Average 1.12%
Bottom Ten States
States Total FY 2007-12 Per-Capita Job Growth FY 2002-12
North Dakota $319,637,895 $467 19.67%
Maine $300,089,883 $226 -0.54%
New Mexico $289,734,600 $139 2.59%
Delaware $251,711,840 $277 0.99%
Rhode Island $235,031,721 $224 -6.40%
Nebraska $185,454,042 $101 4.14%
New Hampshire $182,599,677 $139 0.76%
Vermont $156,422,080 $250 -1.71%
Idaho $146,796,200 $93 7.17%
Montana $140,482,437 $141 9.16%
Average 3.58%
Source: State Economic Development Expenditure Database, The Council for Community and Economic Research (; U.S. Bureau of Labor Statistics.

Rather than tax breaks and incentives to stimulate job growth in targeted industries such as Hershey Co., economic development policy should focus on making the state more attractive for all businesses. A better strategy than trying to pick winners and losers with handouts from taxpayers would be for state and local governments to focus on improving our business climate by taxing and spending less.