$160 million closing fund: Good for large corporations, bad for Minnesota

The Walz Administration recently unveiled a 10-year Economic Expansion Plan with a long list of recommendations. These include proposals to expand access to childcare, invest in education and improve workforce development. Among these worthy ideas is one very bad one, creation of a $160 million closing fund – a corporate welfare slush fund that would waste millions and invite cronyism.

The proposal is part of a section detailing how Minnesota can “commit to our businesses” and envisions a future with new Fortunate 500 firms, an increase in startup companies, and an increase in business ownership among historically underrepresented communities. While these are important goals, corporate bribery will not accomplish any of them. Gov. Tim Walz and his administration should learn from the failed efforts of other states, and Minnesota’s own tax incentive failures, and focus instead on creating a level playing field for small businesses and entrepreneurs.

Corporate subsidies do not work

There are more than 20 states that have created deal-closing funds, which are pools of money used to incentivize business expansion or relocation, often stacking on top of other subsidies. The funds are known for having few requirements, with governors most often having significant discretion over how money is spent. Supporters of these funds, like consultants in the site selection racket, argue that instead of the hassle of passing specific legislation or holding a special session, deal-closing funds allow states to act quickly to attract a potential suitor.

The most prominent example of these funds is the Texas Enterprise Fund (TEF), which has awarded more than $670 million since 2003 to some of the country’s largest corporations, such as Apple, Cargill, Facebook and JP Morgan Chase. In 2014 an audit of the program found that nearly a third of the money from the program had gone to companies that did not even apply for funding, and four years earlier Texans for Public Justice found that Gov. Rick Perry had inflated job numbers for firms that had received funding from TEF.

Texas is not alone in funneling money to large corporations, as business incentive programs tend to send money primarily to big business. Good Jobs First, a corporate subsidy watchdog, surveyed economic development incentive programs across several states and found that 70% of subsidy deals and 90% of subsidy dollars went to large firms. Besides subsidizing giant corporations in an economy that is already highly monopolized, deal closing funds simply do not work. Research suggests that at least 75% of the time, corporate subsidies do not affect a business’s decision on where to locate jobs.

Minnesota busts

A deal closing fund would simply double-down on a form of economic development that has already proven highly unsuccessful in Minnesota. Take JOBZ, the Gov. Tim Pawlenty-era incentive program that provided major income and property tax breaks to companies that relocated or expanded in Greater Minnesota. An evaluation of the program by the Office of the Legislative Auditor (OLA) found that 70% of JOBZ recipients would have expanded without the incentive. The OLA came to a similar conclusion with Minnesota’s Research Credit, finding the largest 20% of corporations received two-thirds of the credit’s total value and that it spurred minimal job growth.

The most recent OLA report on the Minnesota Investment Fund (MIF) was even more damning. MIF provides loans to businesses seeking to expand or relocate, although 74% of those loans have been partially or totally forgiven. According to the OLA, the Minnesota Department of Employment and Economic Development (DEED) has overstated the amount of private investment spurred by MIF, allowed businesses to meet MIF commitments by counting economic activity that occurred before the firm received MIF funding, and that businesses are often not required to pay workers at the wage levels agreed to in their MIF applications.

Promote competition

All of these incentives run counter to historical experience. For example, Minnesota was a high-tech computing hub in the 1960s and ’70s with firms like Engineering Research Associates, Sperry-Rand Univac, Control Data Corporation, Honeywell and IBM-Rochester calling the state home. However, it was the numerous spin-off businesses from these giants, not a pile of corporate welfare money, that enabled breakthrough technologies, created new businesses, and attracted future generations of entrepreneurs and workers.

Minnesota does not need an economic development strategy cooked up in a lab by Big Tech companies like Amazon and Google. Instead, it should focus on creating a level playing field for the small businesses and startup companies that drive job growth and create strong communities. This past session legislators introduced a series of antitrust reform bills that would create new prohibitions on anticompetitive conduct. Governor Walz should be championing an economic development strategy that frees Minnesota from the monopolists crushing small businesses, raising prices on consumers and cutting wages.

Justin Stofferahn lives in White Bear Township and is a public affairs professional who has worked on a variety of tax and economic development issues and is a member of the Minnesota Main Street Alliance leadership team.