Not a Capital Idea
With a double-digit unemployment rate, Ohio is in desperate need of jobs. The latest idea from politicians in Columbus - tax breaks for venture capitalists - isn't the answer to Ohio's problems, though. This top-down, politically-directed "economic development" won't grow the state's economy. Ohio needs a tax and regulatory overhaul to create jobs, not ineffective tax credit programs.
Venture capitalists serve an important function in society. They help provide the funding necessary for some businesses to start up and can make big money when they invest in the right company. The market for venture capital has worked fine and there is little evidence that deserving companies don't get the loans they need.
Regardless, some Ohio politicians want the state to provide $100 million in tax credits to back venture capital bonds issued by banks. Essentially, their proposal would be to ensure there is little risk in these loans. It's a sweet deal for banks. They will make money, as usual, if the venture capital firms in which they invest succeed. But if these firms fail, banks get a tax credit. Of course, taxpayers don't get to share in the profits when the businesses succeed; they only get to share in the pain when they fail.
This is a continuation on the state level of the national policy begun by President George W. Bush: if businesses succeed, they reap the profits; but, if they fail, then taxpayers shoulder the losses. Business owners, of course, love this system. They get paid whether they make good decisions or not. Politicians, too, benefit by claiming unjustified credit for helping the economy. But as the ballooning federal deficit (and the ongoing state budget crisis) shows, there are real consequences to this type of corporatist attitude.
Businesses that make a profit by selling goods and services in the market - as opposed to those that make a profit by obtaining corporate welfare - do so by meeting consumer demands. Competition from other businesses causes them to innovate, find ways to be more efficient, and develop better products and services. All this creates wealth, makes companies more profitable, and improves the lives of consumers.
Businesses that don't innovate or offer goods and services people want go out of business. That, in general, is a good thing since it frees up capital that could be used more efficiently by other businesses. The closing of inefficient businesses is good for the economy.
Corporate welfare, however, keeps some of these inefficient businesses open. In fact, helping inefficient businesses is the implicit premise of these government programs. Business owners taking corporate welfare must turn to the government for capital precisely because private lenders determined they were not worth the risk.
Instead of more corporate welfare, Ohio politicians should be reforming the state's tax and regulatory climate. The non-partisan Tax Foundation recently ranked Ohio's business tax climate worse than all but three states. There are over 2,300 entities in the state that levy taxes, penalizing workers and business owners alike. Reducing the state's burden on wealth creation would do much more to help workers and lower unemployment than this venture capital plan or any other tax credit scheme Columbus politicians create.
Marc Kilmer is a policy analyst with the Buckeye Institute for Public Policy Solutions, a research and educational institute located in Columbus, Ohio.
