Magnitude and Potential Solutions

Magnitude of Subsidy Spending

Recent research provides a clearer picture of the scale of economic development subsidies and potential solutions to the subsidy problem. Slattery (2019) estimates that state governments alone spent about $30 billion on incentives in 2014, which is roughly equivalent to 40% of total state corporate tax revenues[29]. When accounting for local incentives, the total amount could be as high as $95 billion annually[30].

Thomas (2019) offers a more granular look at state-level spending, finding that in 2014, states spent between $5 and $216 per capita on incentives for firms in the form of firm-specific subsidies and general tax credits[31]. This spending varied widely between states, with some states spending more on incentives than they collected in corporate tax revenue.

While specific figures for Idaho are not provided, these national estimates suggest that the state is likely spending a significant amount on economic development subsidies. Given Idaho's reliance on these tools, it's possible that the state's per capita spending on incentives is on the higher end of the national range.

Interstate Compacts as a Solution

An interstate compact offers a way for states to credibly commit to work together to end the subsidy war. A well-structured compact can allow policymakers to escape the economic race to the bottom without being the first to disarm. The idea has momentum—nearly one-third of states have already introduced interstate compact legislation to move toward multilateral disarmament[40].

The benefits of an interstate compact to address economic development subsidies include:

• Collective action: By acting together, states can avoid the fear of losing out to neighboring states that might continue to offer incentives.
• Legal enforceability: Interstate compacts, once enacted, become binding state law and are enforceable in court.
• Flexibility: Compacts can be designed to address specific concerns of member states while still achieving the overall goal of subsidy reduction.
• Potential for federal support: Congress could encourage or mandate state participation in such a compact, providing additional leverage for reform.

Such a compact would help state and local policymakers focus on policies that truly help attract businesses and create good jobs in their communities. In the process, it would also help the United States recover more quickly from economic downturns[41].

Alternative Approaches to Economic Development

Instead of competing through subsidies, states could focus on more sustainable economic development strategies, such as:

• Investing in education and workforce development to create a skilled labor pool.
• Improving infrastructure to enhance connectivity and reduce business costs.
• Streamlining regulations to create a more business-friendly environment without sacrificing necessary protections.
• Fostering innovation ecosystems through support for research institutions and startup incubators.

These approaches align with the Mercatus Center's research on effective economic development strategies and would likely yield better long-term results for Idaho's economy than the current subsidy-focused approach.