Testimony of Matthew J. Brouillette, President, Commonwealth Foundation
Thank you Rep. Argall and members of the House Appropriations Committee for the opportunity to speak to you this afternoon on the important topic of economic development.
You will be hearing from Secretary Yablonsky and the Department of Community and Economic Development following my testimony. And I believe that you will be very impressed with his presentation, his vision for Pennsylvania’s future, and his Department’s proposed programs. In addition, The Commonwealth Foundation very much agrees with the Secretary and Governor Rendell’s assessment of Pennsylvania’s economic problems. We disagree, however, in how the state should go about solving them.
The historical role of the government in economic development has primarily focused on providing “public goods”—including products and services such as roads or sewer systems to the general public. Things that have not typically been provided by private enterprise. In recent years, however, governments have begun to start acting like venture capitalists—giving taxpayer money to select companies.
Of course, all of these government programs are created with good intentions. The promises of job creation and the stimulation of greater investment from the private sector are all things that must happen for Pennsylvania to get on the road to economic recovery.
Unfortunately, the reality is that these government-directed “economic development” programs are ineffective and costly. Let me explain why this is so.
First, government has nothing to give anyone except what it first takes from someone else.
If Governor Rendell takes tax dollars from a thousand businesses through his proposed tax increases and bonded debt and gives it to one business, the one firm may have more resources to hire workers and create products, but the other thousand now have less.
But this isn’t even a zero sum game. The money taken from taxpayers and businesses must first be laundered through at least two state bureaucracies before reaching its intended target. This redistribution obviously removes very limited investment dollars from the economy and does nothing to foster wealth or create jobs. It does, of course, create government jobs that further drain the economy.
The bottom line is that someone is paying higher taxes in order to give someone else a tax break or financial incentive. The result is that one business’s tax benefit is another citizens’ tax burden.
Besides being costly to the taxpayers, government-directed “economic development” is largely ineffective.
An underlying assumption in these programs is that government officials can somehow foster wealth and job creation better than business owners, consumers, workers, bankers, investors, and managers, whose individual decisions form our market economy.
Although Secretary Yablonsky successfully led businesses in the private sector, this does not necessarily mean that he and his board of advisors will be able to reliably predict which businesses will succeed and which ones will fail.
This approach by government is not new to Pennsylvania. Past DCED programs have tried to pick “winners” and “losers” using billions of taxpayers’ dollars as venture capital.
Indeed, Pennsylvania has been a leader among states in the use in the use of tax money for “economic development.” As recently as 1998, Pennsylvania outpaced every other state in terms of government-directed economic development funding. Unfortunately—as you are well aware—the Commonwealth’s economic health remains in critical condition.
What is interesting, however, is that few states seem to benefit from these government programs. Using data from the Pennsylvania Legislative Budget and Finance Committee and the U.S. Departments of Commerce and Labor, we find that the 10 states that spent the most per capita on government-directed economic development in 1997-98 experienced cumulative personal income, population and employment growth rates much lower than the 10 lowest-spending states between 1997 and 2002.
Indeed, the personal income growth rate was nearly 29% lower in high-spending states than in low-spending states. The population growth rate was more than 124% lower, and the employment growth rate was almost 167% lower. Of course, there are important factors other than state government economic development policies that influence economic performance, but the argument cannot be made that states which spend more on economic development are more successful than those that spend less.
But—for argument’s sake—let’s pretend that Governor Rendell’s economic development plans do begin to attract new businesses from outside Pennsylvania. What do these businesses have to look forward to?
First of all, Governor Rendell’s “Plan for a New Pennsylvania” will cost businesses in the Commonwealth an additional $8.65 billion in new taxes over the next 8 years—the equivalent of $1,538 for every current working man and woman in Pennsylvania.
So while the Governor’s speculative economic development plans attempt to lure new businesses to Pennsylvania, his tax and spend plans will severely punish those job providers who have stuck it out over the years under some of the highest business taxes in the nation.
Whether it is Governor Rendell’s retroactive increase of the Capital Stock and Franchise Tax—which will add an additional $1.4 billion burden on businesses in Pennsylvania over the next 8 years—or the increase in the Personal Income Tax, which will cost small businesses at least another $3.2 billion by 2011, doing business in Pennsylvania—with only promises of addressing these problems in the future—has just become even more unattractive.
The reality is that the very problems Governor Rendell hopes to solve will only be exacerbated by these schemes which will remove even more capital from the private sector and funnel it through the government to politically selected projects and programs.
In conclusion, a state-orchestrated economic development policy—where government officials determine which investors and businesses receive preferential treatment or taxpayer assistance—will not bring prosperity back to Pennsylvania. While bestowing benefits on some businesses may create a “favorable” environment for those businesses, it will clearly be at the expense of the vast majority of Pennsylvania’s nearly 300,000 businesses.
Instead, state economic development policy should focus on creating a more favorable climate for ALL investment and job creation. Rather than raising taxes to spur economic growth, Governor Rendell and the General Assembly should be cutting them. This is what will truly turn around Pennsylvania’s economy.
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Matthew J. Brouillette is president of the Commonwealth Foundation, a free-market public policy research and educational institute based in Harrisburg, PA.