Illinois has spent at least $4.9 billion in state and local business subsidies since 2000, after adjusting for inflation. This equates to $288.5 million per year. While these subsidies have saved or created some jobs in the state, Illinois could have created even more jobs and more economic growth if tax dollars had instead been invested in public infrastructure and public education.
Illinois has been using economic development incentives to attract businesses and create jobs for decades. In light of the recent Foxconn deal in Wisconsin and Carrier deal in Indiana, it is timely to tackle the ever-present question of whether subsidies are more economically favorable than investments in alternative projects, such as infrastructure and education. Illinois residents are rightfully concerned about how government spends their hard-earned tax dollars following the protracted two-year budget impasse that resulted in a tax hike. With the state facing $251 billion in unfunded pension liabilities and $15 billion in overdue bills, Illinois cannot afford to waste tax dollars on poor investments and bad deals.
Most basically, economic development subsidies have the potential to negatively impact the economy if they come at the expense of other productive public goods. Whereas business subsidies generally accrue to the richest households and have little “trickle-down” effect on the middle class, broad-based investments in infrastructure and in people improve connectivity, increase worker skill levels, spur innovation, and raise consumer demand.
Governments in Illinois have spent an inflation-adjusted $4.9 billion in state and local business subsidies since 2000. This means that Illinois has spent an average of at least $288.5 million annually in business subsidies (adjusted to constant 2017 dollars). These business subsidies have saved or created an estimated 1,700 jobs per year. However, these economic development dollars could have been put to better use on:
1. Public Infrastructure. This would have created or saved nearly 3,900 total jobs per year. The economy lost over 2,100 jobs per year and $136 million in annual economic activity by doling out business subsidies instead of investing in infrastructure.
2. Public K-12 Education. This would have created or saved over 6,100 jobs per year, including 4,300 direct jobs at public schools. The economy lost about 4,400 jobs per year and $189 million in annual economic activity by spending taxpayer dollars on business incentives rather than public schools. Instead of subsidizing large corporations, Illinois could have added one teacher to every single public school in the state over the past 17 years.
3. Higher Education. This would have created or saved over 3,400 jobs. The economy lost about 1,700 jobs per year and $162 million in annual economic activity by not funding higher education.
4. Working-Class Tax Credits. Doubling the state’s Earned Income Tax Credit (EITC) match to 20 percent would have created or saved over 2,500 jobs per year, about 800 more than were created through business subsidies. The economy lost $74 million in annual gross state product by not doubling the EITC.
5. Balancing Budgets. Since economic development incentives increase the budget deficit, they contribute to the next credit rating downgrade, which costs taxpayers and reduces investor confidence. Thus, subsidies can come at the expense of both taxpayers and reduced investment from other companies that do not receive subsidies.
Economic development incentives are an inefficient way to spend taxpayer dollars because they are less effective than the policy alternatives. Rather than using valuable taxpayer dollars to subsidize large corporations, Illinois should pursue broad-based investments in people and infrastructure which would create a larger and longer-lasting impact on the state’s economy.