Federal Pandemic Relief Could End the Interstate Economic Development Arms Race

Abstract

Recent projections estimate that the state and local budget shortfall caused by COVID-19 will exceed $950 billion. Congressional Democrats have championed a bill containing almost $1 trillion in aid, but Republicans have resisted what they say is a bailout for some states’ longrunning fiscal difficulties. Restricting state and local expenditures for targeted economic development subsidies offers an easy compromise. The idea is not controversial; many state and local policymakers already want to exit what amounts to a subsidy arms race, but no one wants to be seen as unilaterally disarming. While it wouldn’t fully solve states’ budget shortfalls, reclaiming the $48–95 billion spent on subsidies each year would certainly help. Furthermore, academic research finds that subsidies don’t contribute to economic development. Getting rid of them would assist the United States’ economic and fiscal recovery from COVID-19. The funds spent on targeted economic development subsidies represent the lowest-hanging fruit available to fill holes elsewhere in the budget. Congress should help states collect that harvest.

Keywords: economic development, public finance, subsidies, tax benefits, state government, local government, expenditures, government bailouts, federalism, intergovernmental relations, intergovernmental grants, institutions and growth, covid-19, pandemic, public health, health policy

JEL Classification: H2, H7, O4