Many politicians — in Nevada and elsewhere — believe that providing taxpayer subsidies to favored businesses is a fine way to foster economic development. In reality, it instead appears to be the best way to create new jobs for lobbyists.
In a study published in June in the journal Small Business Economics, Russell S. Sobel, Gary A. Wagner and Peter T. Calcagno examine data from all 50 states from 1997 through 2019 to conclude that, “When states award large tax breaks to attract companies, they may actually be encouraging more lobbying instead of real economic growth.”
The analysis revealed that, when a state awards its first “extraordinary large” business incentive, “employment at lobbying firms increases by 3.6 percent, with gains concentrated in state capital counties, where lobbyist employment rises nearly
5 percent.”
The conclusion shouldn’t be surprising, but it’s rarely discussed. When governments dole out tax dollars — whether to promote development, support non-profits, diversify the economy or for other goals — special interests seek to influence the process in hopes of getting a share of the loot. This distorts the marketplace in ways that often undermine the stated objectives.
“This suggests that extraordinarily large incentives shift entrepreneurial effort from productive innovation toward unproductive rent-seeking activities,” the authors write. They urge that state lawmakers reconsider large development incentives “as these programs may inadvertently foster crony capitalism and wasteful lobbying rather than the genuine economic development they promise.”
Nevada saw this dynamic in action last year when lobbyists flooded Carson City as lawmakers took up the controversial issue of spending billions on an expansion of the state’s TV and film tax credits.
Never mind that, in addition to being a boon to lobbyists, many of these subsidies fail to live up to the hype. As Reason magazine’s Joe Lancaster pointed out last month, a 2024 paper from Russell S. Sobel, a professor of economics at The Citadel, highlighted the folly of taxpayer subsidies as a means of creating economic prosperity.
“There is now a large literature that examines the data and clearly brings into question the effectiveness and accountability of these programs,” Mr. Sobel wrote, “finding they do not lead to statistically significant improvements in tax revenue, employment, economic growth or personal income.”
Indeed, the most promising approach for states seeking to attract business is to encourage investment and entrepreneurship by creating a favorable regulatory and tax climate for all, rather than showering favored special interests with taxpayer largess. Unfortunately, too many elected officials prefer the photo-ops and media coverage that come with the latter.
