Half Past the Month: That Crony Capitalist Elephant

May 11, 2018

AN ELEPHANT HAS ENTERED THE ROOM of Indiana’s economic-development officialdom. Nobody wants to talk about the growing amount of research challenging its policy formula. It costs a lot and it doesn’t seem to work.

An adjunct scholar of the Indiana Policy Review last month described it in the inverse. He told a group of Indiana businessmen and opinion leaders they would be better off without any official economic-development effort whatsoever. Rather than provide an economic advantage over competing cities, he says it has merely facilitated a “race to the bottom.” (1)

And today, a city councilman cited the previously ignored research to support defunding his community’s economic-development apparatus. (2) Specifically, he would repeal his city’s business personal property tax, the one that local economic-development agencies exempt in order to favor certain businesses over others. He noted that Indiana’s total effective tax rate on mature capital-intensive manufacturers is 19.2 percent compared with 5.1 percent in Ohio and Michigan. Reducing or eliminating that disadvantage across the board would help attract jobs and investment, some say, as well as stymie crony capitalism. 

Yet, states and localities are spending approximately $70 billion per year on targeted incentives. Property tax abatements, tax increment financing and job-creation tax credits for “new or expanding businesses” have more than tripled since 1990. And Indiana has dived full in. Gov. Eric Holcomb and the mayors of Indiana’s mid-sized and larger cities are enthusiastic participants in the new policy formula as was Vice President Mike Pence when he was in the governor’s chair. Meanwhile, Indiana media is reticent on the issue — fearful maybe — and not asking the hard questions about how it all is working out.

So who’s right? Economists at George Mason University (3) have assembled a review of the literature on the subject. Read the citations and decide for yourself:

— Craig Ladwig
  1. Barry Keating. Spring Seminar, April 12, 2018, Fort Wayne, the Indiana Policy Review.
  2. Jason Arp, who represents the 4th District on the Fort Wayne City Council, introduced a resolution today asking the Allen County Income Tax Council to approve a blanket exemption on taxes for equipment purchased after Jan. 1, 2019. A May 22 public hearing is scheduled.
  3. Matthew Mitchell, Daniel Sutter and Scott Eastman. “The Political Economy of Targeted Economic Development Incentives.” The Journal of the Southern Regional Science Association (2018).


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