Practically every state constitution contains a provision forbidding the government from subsidizing private businesses with taxpayer money. These “Gift Clauses” were adopted in the nineteenth century after government funded railroad and canal projects—only to have them fail, leaving taxpayers holding the bill. But although our ancestors hoped to protect us from making the same mistakes, state courts nowadays frequently ignore Gift Clauses, allowing the government to spend taxpayer money for “job-creating” boondoggles that enrich private interests and benefit politicians, but leave the taxpayer with bigger and bigger bills to pay.
That’s what happened in Corsicana, Texas, which years ago agreed to pay a private company to build and operate a store, hoping that the business would help improve the local economy. But when the store closed a few years ago, city officials refused to continue paying. So the company sued, arguing that the city was violating its contract. That argument was rejected by an appellate court earlier this year, which held that the contract was unconstitutional to begin with, because it violated the Texas Gift Clause. Now the case has been appealed to the state’s highest court, and the Goldwater Institute, along with our friends at the Texas Public Policy Foundation, have filed a brief urging the justices to follow the Constitution and dismiss the lawsuit.
Our brief explains that not only is government funding of private businesses often wasteful, but it is inherently wasteful. That’s because if a business is asking for a government handout, that’s because it hasn’t been able to get a loan from a private bank—precisely because private-sector money lenders regard the business as unlikely to be profitable. It’s therefore no coincidence that government-funded businesses almost always cost more than they actually produce.
An even more important issue in the case is the question of government control over public money. Most state courts have held that while Gift Clauses forbid the government from handing money to a private business, the government can purchase goods and services from private businesses—as long as the government ensures that there are sufficient “controls” in place to ensure that it actually gets the services it’s contracting for. These controls can take different forms—they can include reporting and oversight rules, or provisions that allow the government to get its money back if the recipient of tax dollars fails to follow through.
But none of those existed in the Corsicana contract. Instead, the government simply funded the building and opening of a store. And that just isn’t a “public” purpose—that’s a private purpose. The city failed to include any provisions to “control” the expenditures and ensure that the public received any genuinely public services in exchange for its money. That’s why the contract was unconstitutional.
The Corsicana case comes on the heels of the Texas Supreme Court’s important ruling in another case that Goldwater and Texas Public Policy Foundation litigated together: the Borgelt lawsuit, which challenged the constitutionality of government funding of public-sector labor unions. There, the court emphasized the importance of the “control” requirement, and held that it would be unconstitutional for government to hand out money to any private entity without having rules in place to ensure that the taxpayer actually gets public goods or services in return.
We’re urging the court to put teeth in that requirement and hold the Corsicana agreement unconstitutional. Public money should be spent on public things—not on enriching politically influential private interests.
You can read our brief here.
Timothy Sandefur is the Vice President for Legal Affairs at the Goldwater Institute.
