Tennessee's corporate welfare scheme needs reform

November 16, 2006 8:29PM

By Justin Owen Drew Johnson explains the problems with Tennessee’s corporate welfare programs. This article originally appeared in the Maynardville-News Leader. A decade ago, Tennessee underwent welfare reform—massively overhauling the failing welfare bureaucracy—resulting in widespread job creation, business growth and a reduced burden to taxpayers. Today, business leaders and taxpayers should encourage the state to take a lesson from this and reform a different kind of welfare: corporate welfare. This year, the Tennessee Department of Economic and Community Development (ECD), the state’s administer of corporate welfare, will cost Tennessee’s taxpayers over $100 million. What began as a well-intentioned program to encourage business growth has become a scheme that allows bureaucrats, rather than consumers and market forces, to determine the winners and losers in business. The result is a program that forces businesses subsidize their competitors through taxes. Worse, it fails to benefit the businesses it claims to help. For the better part of 90 years, Athens-based Mayfield Dairy Farms has been among Southeast Tennessee’s largest employers, as well as one of the largest agricultural employers in the state. The Mayfield family, which settled in McMinn County in 1820, began selling milk before the First World War. In 1923, the Mayfield’s expanded their dairy operation by purchasing an ice cream freezer. Eight decades later, the company’s ubiquitous yellow milk jugs are a staple in supermarkets across the Volunteer State and their ice cream is a Tennessee summertime tradition. As one of the most successful regional ice cream makers in America, Mayfield and its employees pay millions in tax revenue to the state. With a disturbing disregard for both capitalism and fairness, bureaucrats in Nashville recently chose to use some of those same tax dollars to subsidize one of Mayfield’s leading competitors in the ice cream business. In 2005, the makers of Blue Bell ice cream, a Texas-based newcomer to Tennessee’s freezer cases, were awarded a $216,000 taxpayer-funded state grant to offset infrastructure costs related to its new distribution facility in Nolensville. This grant allowed Blue Bell to build part of its facility at a tremendous cost advantage when compared against most other ice cream manufacturers in the state—including Mayfield—who pay for their production and distribution facilities out of their companies’ bottom line. The rise of Mayfield is the quintessential American success story. Through risk-taking and backbreaking hard work, a threadbare rural family began a small business. With a quality product, it grew—taking no public money and paying full fare in taxes—year in and year out. Through ECD, taxpayers, including the Mayfield family, are forced to help subsidize a Texas corporation that will compete directly with Mayfield. The scenario seems unthinkable—even laughable—yet it happens dozens of times every year as a result of Tennessee’s absurd economic development bureaucracy. With the startling system created by the Tennessee Department of Economic and Community Development whereby businesses subsidize their competitors, the question remains: Does economic development spending actually develop the economy? Despite a nine-figure budget and a staff of more than 200 bureaucrats, the answer, according to the state’s own internal audit, is “nope.” Two grant programs consume the lion’s share of state corporate welfare funding. One, the FastTrack Infrastructure Development Program, entices private sector businesses to locate or expand by subsidizing infrastructure improvements. The other, the FastTrack Job Training Assistance Program, bankrolls the planning, development and implementation of a customized training program for recipient companies. State taxpayers paid $40.6 million to fund the FastTrack Infrastructure Development Program in 2005, including the grant to Blue Bell. Despite this hefty expense, a 2005 audit of ECD by the Tennessee Comptroller of the Treasury chided the program, saying, “It is unclear whether the program has been successful in encouraging job creation and retention or encouraging businesses to locate or expand in the state.” The FastTrack Job Training Assistance Program faired even worse in the same audit, which found that there does not “appear to be a connection between the amount of assistance given to a company and the number of jobs created or the wage level” of those jobs. Of the 10 contracts reviewed in the audit, FastTrack Job Training Assistance Program grant-recipients guaranteed 835 new hires resulting from grants. Combined, those same companies reported only 407 hires—fewer than half of the promised number. It is exasperating that the state spends $100 million of taxpayers’ money to administer an economic development scheme that forces Tennessee businesses to subsidize their competition. The fact that this spending results in a very poor return on taxpayers’ investment makes the continuation of Tennessee’s ECD untenable. State legislators who are truly interested in economic development have an opportunity to help all businesses by shuttering the failed Department and returning the $100 million the bureaucracy devours every year to private enterprise by reducing the state business tax. A lower tax burden means that business owners can invest more of their money in growing their business, resulting in job creation and true, market-based, economic development. This plan allows the state government to get out of the business of determining the winners and losers in the private sector economy, and allows the state to focus on the only role it should rightfully assume in the realm of economic development: ensuring a universally favorable business climate, free from high taxes and regulatory burdens. Drew Johnson is the president of the Tennessee Center for Policy Research.