January 22, 2023
How Efficient is Government Spending?
Part 2: Incentives & Subsidies
By: Art da Rosa, PE, MPA, CFM
Recently, I have had numerous conversations with people regarding government incentives and subsidies. These conversations revolve around governments paying a portion of the cost for a preferred activity or building important infrastructure to attract preferred activities.
However, these are not all. The government also regulates by disallowing certain investments in favor of others. To explore these concepts, I would like to recount the story of downtown Fresno, California.
Fresno was experiencing massive growth in California, which left its downtown unattended and abandoned. The city conducted a comprehensive study to revitalize its downtown. The plan calls for upgrading their freeway system, completely redoing their city hall, building a baseball stadium, and attracting large, name-brand stores.
Freeway and Grants
For the freeway system, two new freeways were added. With the two already in existence, four freeways serve that area. All four point to Fresno’s downtown, with a clear message of facilitating traffic to their downtown. They received $600 Million in both federal and state grants.
After about two decades, the freeways were built. They did facilitate traffic circulation, but most of the traffic uses the freeway system as a passthrough. Most traffic did not go to their downtown, thus defeating the original intent.
City Hall and Property Tax
They updated their city hall, using mostly local funds (that is, from property taxes). The new city hall looked attractive and modern. Several movies were shot at that location due to its new look, with the city eagerly showing off its new image. However, the new building did not attract new visitors. The foot traffic to the city hall remained approximately the same. Their property tax, however, went up permanently, with no real increase in the overall service.
Baseball Stadium and Incentivization
A baseball stadium was also built. A combination of various community development grants was used, along with bonds that the city took out. The justification was that it would spur development and help out a projected number of mom-and-pop stores.
With the new stadium, the City of Fresno managed to attract a Minor League Baseball team. New stores were opened as well. Initially, the stadium was well attended. With time, attendance leveled off. The mom-and-pop stores had many turnovers, as baseball did not generate enough business to sustain them. The baseball stadium turned out to be a money pit.
Name Brand Store, Tax Incentives, and Bypassed Development Codes
Through tax incentives and relaxation of their development codes, the city managed to attract one well-known sporting goods store. This store does not pay any taxes, and the new store did attract customers downtown. The revitalization of downtown, however, was questionable.
There were other projects as well, such as luxury apartments and new parking garages. After approximately $3/4 Billion, downtown Fresno is no better than before. It is still sparsely attended. After dark, it remains a virtual ghost town. The multiple government funding scheme along with the skirting of their laws failed to produce the result they sought.
I want to balance this article on a positive note. Just outside downtown Fresno is a vibrant area where an old theater stood, the Tower Theater. It was considered old and small. Some residents had the idea of renovating the theater and opening some specialized restaurants adjacent to it. They planned to have live shows and restaurants to serve their clients.
Their hard work was rewarded with a flow of steady clientele. Soon, more restaurants opened up. Street vendors started to open shops. New theaters came. Today, it is a vibrant entertainment district. All these, without government incentives and subsidies.
By surveying various government agencies and municipalities, you will be able to find successful examples of how government subsidies and incentives were helpful to them. In fact, many of these examples would be true. Inquiring further, though, you will discover that there were more examples of failure than success. The vast majority of government incentives and subsidies produce a low rate of return.
Why? The biggest reason is how decisions are made. If the decision-making process points to a top-down approach (i.e. the decisions come from the government and experts to the people), the results tend to be poor. The lesson learned is that government incentives and subsidies produce a temporary uptick in targeted activities. However, these economic upticks seldom last. Incentives, grants, and subsidies amount to buying on credit. You get temporary satisfaction, but you will have to pay it back eventually. If the product that the government wanted to push for is not what the people truly want, the return on an investment will be poor.
If the decisions were made by We the People, flowing from families and communities, there would be a much higher chance of success.
Art da Rosa, PE, MPA, CFM