Economic Development
In 2011, lawmakers dramatically changed the state’s economic development infrastructure.
They passed AB 449, which created a new cabinet-level position for economic development, restructured the state’s economic development efforts in a more top-down manner and created a “Catalyst Fund.” The declared purpose of the Catalyst Fund is to provide financial incentives to firms considering moving to, or expanding in, Nevada.1 Lawmakers in 2019 reduced appropriations toward the Catalyst Fund, but left in place a program that allows the Office of Economic Development to issue up to $5 million annually in transferable tax credits, effectively accomplishing the same purpose.2
Lawmakers should question whether a state-directed approach to economic development is superior to a market-directed approach and whether bureaucrats are better able to identify viable opportunities for successful investment than private entrepreneurs.3
Key Points
State-directed economic development is inefficient. When production decisions are shaped by politicians instead of market forces – i.e., consumer decisions – society’s capital stock is likely to be invested in ways that serve the best interests of politicians, not consumers.
Public subsidies for private firms promote cronyism and are unconstitutional. The availability of public subsidy through the Catalyst Fund deters productive, entrepreneurial activity in favor of rent-seeking. As a result, incestuous relationships develop between politicians and private industry that can devolve into outright cronyism. During the 19th century, multiple states’ experiences with such cronyism prompted them to pass constitutional amendments prohibiting the giving of public monies to private corporations. In fact, Article 8, Section 9 of Nevada’s constitution explicitly forbids the type of subsidy scheme used by the Catalyst Fund:
Steps can be taken to promote economic development, but AB 449 was the wrong approach. Private entrepreneurship is the best means to overcome the impact of recession and to build a sustainable economic future. However, in many ways, Nevada’s policy environment has been and remains hostile to the formation of new, small businesses. Licensing, zoning, and filing requirements, labor market strictures, and a cumbersome regulatory apparatus discourage aspiring entrepreneurs and impede economic recovery.
Tax giveaways force a higher tax burdens onto non-privileged businesses. In late 2014 and 2015, Nevada lawmakers convened special sessions to approve a combined $1.5 billion in tax giveaways for two specific manufacturing firms, Tesla Motors and Faraday Future. In between those special sessions, lawmakers met in general session to raise the modified business and commerce taxes on Nevada businesses lacking such political connections. Politically unconnected businesses are thus forced to cross-subsidize competitors armed with political clout.
The state shall not donate or loan money, or its credit, subscribe to or be, interested in the Stock of any company, association, or corporation, except corporations formed for educational or charitable purposes.
Subsidies are taken when they’re available. In FY20 and FY21, the Office of Economic Development granted tax abatements for new locations of Foot Locker, T-Mobile and Kroger. It also awarded cash from the Catalyst Fund to Petco and Starbucks. It’s debatable whether these entities would have installed their new locations without subsidy.4
Recommendations
Clarify and restrict the mission of the Office of Economic Development. Nevada does not need a cabinet-level agency to dole out patronage. However, the Office of Economic Development could take meaningful steps to ensure future economic development if its mission is changed to identify and correct policies that unnecessarily impede new business formation.
Clear the path for entrepreneurs. Nevada Policy has produced a comprehensive guide to economic development detailing a series of highly specific policy changes that would facilitate sustainable growth and economic development in Nevada.5
1 Nevada Legislature, 76th Session, Assembly Bill 449.
2 Nevada Legislature, 78th Session, Senate Bill 507; See also: Michael Schaus, “Transferable Tax Credits,” NPRI commentary, December 13, 2016.
3 John Locke, The Second Treatise of Civil Government, 1690; see also, Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations, 1776.
4 Nevada Governor’s Office of Economic Development, Annual Catalyst Report, FY20 and Annual Report, FY21.
5 Geoffrey Lawrence and Cameron Belt, “The Path to Sustainable Prosperity: Removing the Obstacles Facing Nevada’s Entrepreneurs,” NPRI Policy Study, January 2013.