Michigan taxpayers just gave $16 million to seven private railroad companies. The state transportation department chose the recipients as part of an initiative called the Michigan Railroad Enhancement Program, which was launched last year. This is one of three programs that provide taxpayer-funded favors to select railroad companies.

Handing out subsidies and other government support to private industry is commonplace today, but the practice used to be explicitly illegal in Michigan, and the prohibition was firmly rooted in state law.

Michigan has a long history with railroad subsidies. The state got into financial trouble in its early years trying to boost the industry. Using taxpayers’ money to support the industry was justified for the same reasons we hear today: Railroads were important "internal improvements" that generated positive ripple effects throughout the economy.

Subsidizing railroads "will be of great service to the entire population of Michigan,” the Detroit Free Press argued on Jan. 13, 1838. “It will create new life in every kind of business ... and will place Michigan on a footing with any of the new states in the Union." Many politicians would make a similar case today about the industry du jour. They often claim the state must compete in some type of zero-sum game with rival states.

We don’t call them internal improvements anymore; instead, politicians refer to "economic development." Giving select railroad companies special treatment in the name of economic development has bipartisan support. Gov. Whitmer, a Democrat, noted that "rail creates jobs and serves communities across our state," in a news release about the new program. State Sen. Roger Victory, a Republican, said rail subsidies are "smart investments" that "will unlock new levels of production and improve logistics across the board." The state Department of Transportation promises the spending will "immediately result in quantifiable and non-speculative public benefits."

But long ago, these and similar arguments were roundly and repeatedly rejected by state courts. Michigan Supreme Court Justice Thomas Cooley led this effort and explained why select business subsidies are inappropriate.

In an 1870 case, Cooley argued that even though "the public may reap many and large benefits from [railroads]," it does so "only incidentally, and only as they might reap similar benefits from other modes of investing private capital." In other words, railroads provide public benefits, but that by itself does not qualify them for special treatment, because the same could be said of almost any private business.

Cooley reasoned that if the state gets into the business of subsidizing private industries, it cannot avoid picking and choosing winners and losers. The state would have to violate an essential principle of American governance: the equal and fair application of the law. Cooley explained:

But the discrimination by the State between different classes of occupations, and the favoring of one at the expense of the rest, whether that one be farming or banking, merchandising or milling, printing or railroading, is not legitimate legislation, and is an invasion of that equality of right and privilege which is a maxim in State government. When the door is once opened to it, there is no line at which we can stop and say with confidence that thus far we may go with safety and propriety, but no further. Every honest employment is honorable, it is beneficial to the public; it deserves encouragement.

The precedent set by the Cooley court stood for about 70 years. State courts repeatedly rejected arguments made by industries claiming they were uniquely important to Michigan's economy and worthy of special taxpayer support. Streetcar companies, sugar beet manufacturers and corn farmers were some that tried and failed.

But eventually, the Michigan Supreme Court permitted the state to spend taxes promoting the interests of a select industry. The case involved apple growers. Amazingly, the court did not directly address the established jurisprudence led by Cooley. It instead reasoned that because the apple industry is “so large and important” to Michigan's economy, it can receive taxpayer support. Countless industries could claim the same, so this blew the lid off any limits on handing out taxpayer subsidies to private businesses.

Giving select businesses special treatment is now so ubiquitous that it is difficult even to catalog each instance. Michigan lawmakers last year authorized more than $4.3 billion in direct business subsidies. But nothing has really changed since the state’s early years: favoring select businesses with taxpayer support is still unfair and inappropriate.

Permission to reprint this blog post in whole or in part is hereby granted, provided that the author (or authors) and the Mackinac Center for Public Policy are properly cited.