As the current recession pulls revenues down in states across the country, legislatures find themselves between a rock and a hard place, or at least that's how the situation is often presented. Sometimes budget crises are portrayed as a choice between several horrific alternatives. (Cut healthcare for low income children or programs for the elderly?)
So you would think that every state facing such cuts would use federal stimulus funds to avoid them, right? Wrong. Federal stimulus aid to states is explicitly intended to protect essential services such as health care and education, but a recent article in Business Week explains that some states are using this money to indirectly finance tax incentives for businesses. In some cases it has been suggested that tax cuts for corporations may actually threaten states' eligibility for these funds!
In an interview for the article, Greg LeRoy of Good Jobs First notes that, "When a cash-strapped state is giving out an enormous tax package and also getting federal money, the left hand, in this case the incentives, is connected to the right."
Economic research has shown that if tax incentives to businesses are financed by cuts in spending on essential services and infrastructure, the costs may far outweigh the benefits. Corporate tax breaks (like this one in North Carolina, worth almost $70 million) don't produce anywhere near enough economic benefits to offset their costs. Even worse, most are simply handouts to companies who would have invested anyway.
These giveaways are expensive and clearly contribute to declining revenues. On the other hand, research suggests that the benefits of public services are likely more important than tax costs as determinants of business location. Instead of lining the pockets of large corporations, states should be engaging in pro-growth policies that ensure low- and middle-income families don't bear the full brunt of the current economic storm.
For more on costly corporate subsidies, check out Good Jobs First.