Republican industrial policy

By Norman Leahy | Thursday, February 2nd, 2012 | Policy, Virginia

Jim Bacon has an excellent analysis of what he dubs, rightly, as “the Jobs Governor’s Industrial Policy.” In this case, it’s a proposal to offer tax subsidies to businesses that locate along the Route 460 corridor — to the tune of $50 million. Jim asks a few trenchant questions about the wisdom of such subsidies:

First, if the Port of Virginia is so well positioned to attract new cargo traffic when the Panama Canal widening is complete in two years, and if the state is already subsidizing construction of a new stretch of Interstate-quality highway, why do we need to subsidize corporate investment to the area? Is Virginia that uncompetitive?

One possible response is that other states are subsidizing new corporate investment, so we need to as well. That logic fails utterly, too, as I shall explain in the second point:

Do we really want to create an expectation among companies investing in Virginia that subsidies are there for the asking? That just encourages them to press for more, whether they need the assistance or not. The giveaways vitiate the fiscal conservative’s ideal of creating a level tax playing field for everyone. Our goal should be to make the tax base broad as possible in order to set rates as low as possible. Tax subsidies may create short-term job gains — jobs that might have come to Virginia anyway — but they are the ruin of tax policy. The existence of tax loopholes keep rates higher, thus discouraging economic activity in sectors not favored by politicians. Trouble is, we never see the jobs not created, so we never know what we are losing.

Thirdly, the argument for subsidizing job creation ignores the impact of those jobs on the demand for infrastructure and government services in areas now lacking them. It’s one thing to land jobs in a population center like Norfolk-Virginia Beach where thousands of unemployed factory workers could be put back to work without relocating or straining public services. It’s another thing to bring the jobs to out-of-way places like Sussex and Isle of Wight counties.

Right on, Mr. Bacon. This is industrial policy, plain and simple. That it has accelerated to such a degree under the current administration has long troubled me, and was fodder for more than one of my old Washington Examiner columns.

The problem is, the constituency for continuing the subsidies, incentives and giveaways is quite large, and very strong among Republicans. A Quinnipiac poll from December asked, “The state of Virginia has sought to convince businesses to move to the commonwealth by offering them tax credits or subsidies. Do you think this is a good idea or a bad idea?”

For those who believe in being pro-market, rather than pro-business, the results were shattering: 63 percent thought handouts were great, while just 25 percent thought they were terrible. Among Republicans it was 76-15 (showing, again, that just because someone calls themselves a Republican doesn’t mean they are above feeding at the public trough).

So the Governor’s industrial policy rests on very strong political ground and it is highly likely he will be able to get whatever sort of subsidies he wishes out of a compliant General Assembly.

As Jim notes:

This welter of economic development initiatives may burnish McDonnell’s credentials as “the jobs governor,” but it is not well thought out from a tax perspective. Virginia is becoming as bad as the federal government. We are creating so many subsidies and tax loopholes that it’s impossible to keep track of it all, much less to make economic decisions based on economic fundamentals. Conservatives have a name for this kind of boosterism. It’s called “industrial policy.” It is antithesis is small government and free markets.

But it does win votes. And that is what really matters.

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