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Economic Development or Legal Plunder

Should taxpayers “give” $2 million to a $16 BILLION company?

Most of you would undoubtedly answer with a resounding: NO!

Unfortunately, that’s what’s happened in the case of an expansion to a Hershey’s Chocolate factory and they aren’t the only ones. As we have previously noted, much of the “economic development” funds come through taxpayers taking on more debt.

Milton Hershey was a man who generally wanted to make the lives of his workers (and people in general) better. Would he approve of adding $2 million to the heavy debt burden already heaped upon Pennsylvania taxpayers to pay for a factory expansion? Would he want his company to rely on the political connections of his board members to secure funding?

We doubt that very much.

He would have used $2 million of the company’s $638 million net income from last year to fund the project.

In addition to direct taxpayer subsidy (or, corporate welfare) through the transfers of cash to corporations, there are more subtle ways that we are forced to “support” a select industry or sector of the economy. Currently, Pennsylvania has the second highest corporate tax rate in the nation. A recent package of legislation called the “Made in Pennsylvania” bills (makes you feel all warm and fuzzy doesn’t it) were introduced in an attempt to mitigate the impact of that tax burden and make Pennsylvania a more attractive place for business investment. However, the tax credits benefit only a select group of industries at the expense of existing businesses and without improving the business climate as a whole.

If this all evokes a feeling of déjà vu, that’s because this is the same state directed economic development approach that Pennsylvania has taken for more than a decade. And, it has failed miserably. While testifying before the Pennsylvaina House Finance Committee on the Made in Pennsylvania legislation, Katrina Currie of the Commonwealth Foundation presented a detailed quantitative analysis* regarding the repeated and consistent failure this approach has yielded for Pennsylvania.

In addition to the analysis Ms. Currie makes passing mention to Fredrick Bastiat, a 19th century political economist who introduced the “Broken Window Falacy”:

“…a young hoodlum throws a brick through a shopkeeper’s window.   A crowd gathers, and someone begins to explain why the broken window is a good thing—the shopkeeper will have to buy a new glass window, creating work for a glassmaker, and pay someone to install the new window.  Of course, this is only the seen effect.  The unseen impact is the opportunity lost, because the shopkeeper has to use money he would have spent elsewhere (to hire a new employee, to expand his business, etc.) to pay for the now-broken window.”

This is certainly an appropriate metaphor for the mindset of state directed capitalism. However, Mr. Bastiat coined another term that better describes Pennsylvania’s economic development strategy: Legal Plunder.

“But how is this legal plunder to be identified? Quite simply. See if the law takes from some persons what belongs to them and gives it to other persons to whom it does not belong. See if the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime.” (The Law)

Beyond taking from taxpayer for the benefit of another, Legal Plunder also rewards a group or corporation on the basis of who they know, or how good of a lobbyist they can hire. Circumventing the free market and relying on the coercive power of the state government creates the conditions necessary for crony capitalism (and corruption) to thrive.

Although improving the tax rate and lowering regulatory burdens for all Pennsylvania businesses will result in fewer photo opportunities for the political class, it will create the conditions that will allow the thousands of existing businesses in Pennsylvania to flourish.  Furthermore, it might move the Commonwealth out of the bottom 10 states in the country in terms of business friendliness and attract businesses because they want to not because Harrisburg bribed them with tax dollars.

And, wouldn’t that be something?

*Note: You should take a couple minutes to read the testimony; it’s a real eye opener.

This post is an adaptation of a newsblog posted on the Citizens Alliance of Pennsylvania website.

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