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POLITICS

When corporate welfare is illegal — the ‘Gift Clause’

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Politics,Beltway Confidential,Timothy P. Carney

I constantly write about the immorality, economic stupidity, and moral hazard of government handouts to private entities — like Virginia Gov. Bob McDonnell’s $4 million grant to the Washington Redskins — But what about the illegality.

When the Rhode Island government gave a $75 million loan guarantee to Curt Schilling’s software company, bureaucrats might have been guilty not only bad investing, but also of violating the state constitution’s “Gift Clause.”

Trey Kovacs and Jessica Miller explain in a Providence Journal piece:

If there is a silver lining to all this, it is that a solution is readily at hand, if politicians are willing to use it. Rhode Island’s constitution contains a provision known as the “Gift Clause” that prohibits incurring state debt for private gain.

The Rhode Island provision states that the “general assembly shall have no powers, without the express consent of the people, to incur state debts… nor shall it in any case, without such consent, pledge the faith of the state for the payment of the obligations of others.” Rhode Island is not alone; another 47 state constitutions contain similar provisions–that are often neglected or subverted.

The purpose of the Gift Clause is to protect taxpayers from public financing fiascos like 38 Studios, but Rhode Island elected officials circumvented its prohibition on subsidies by issuing “moral obligation bonds,” which are issued at higher interest rates due to the fact Rhode Island can default on the loan. These moral obligation bonds deny taxpayers a say on how their money is invested. As a result, Rhode Island taxpayers will be paying off 38 Studios’ debt for years to come.

I had never heard of Gift Clauses, but apparently many states have them. Seems that some law suits based on this provision could help slow down the rush of state-level corporate welfare.

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