Governor Paterson is reportedly having trouble finding a distinguished business leader to head the Empire State Development Corporation. That’s not surprising. The agency’s giveaways are an embarrassment.

The ESDC selectively dispenses tax relief and other financial benefits to companies in regions that need economic development under its Empire Zone program. It also gives grants of between several hundred thousands of dollars and several millions of dollars to companies for plant expansions, capital equipment, and other projects, all for the nominal purpose of keeping and creating jobs.

Here’s the hitch: Only 2% of businesses in the state are beneficiaries. Which businesses? Too often, those with political connections. In 2003, the Buffalo News reported that Empire Zones were failing because the program was tainted by political favoritism. The next year, the New York State Assembly held hearings on these abuses. In 2007, the consulting firm A.T. Kearney documented how the Empire Zone program had been distorted by political patronage.

For the lucky few companies, the Empire State Development money is just one of several sources of public funding. A politically connected nanotechnology company near Albany received more than half a million dollars from the Empire State Development Corp. early in this decade, and took in even larger sums directly from an Albany area legislator in the form of a “member item,” a euphemism for the pot of tax revenue each legislator has to dole out at his own discretion.

A spokesperson for the legislator defended the huge payouts, saying the company might move to the Southwest otherwise. He said it’s “no different from what we’ve done over and over again and will continue to do in the future.”

Sadly, that’s true. The state budget completed last month contains hundreds of millions of dollars of such funding, made possible in part by new taxes on health insurance plans and credit card transactions. All that is bad news for New Yorkers, especially for upstaters.

Upstate New York has been devastated by the mass exodus of manufacturing businesses. Upstate residents in their 60s and 70s are watching their children and grandchildren move out of state to get jobs. It’s a shame that families cannot stay together. Hamilton County has lost 4% of its population since 2000. The A.T. Kearney report confirmed that the obstacles to growth upstate are high taxes, stifling regulation, and an aging infrastructure, but this region is not destined to be poor — the area offers an impressively educated workforce.

The remedy for upstate’s depressed economy is lower taxes across the board and a regulatory climate friendly to all businesses. It is inequitable to tax businesses and individuals at high rates and at the same time dispense largesse to a mere 2% of businesses.

Worse still, a former head of the Empire State Development Corporation also raised political contributions for the governor and his party. Such a situation creates an appearance of corruption and should not be permitted. That is not a Democratic or Republican idea. It’s simply an honest one.

Even if politics didn’t taint the agency’s work, the premise that grants, tax breaks, or any investment should be directed to a company based on a pledge to create jobs, rather than meeting a standard of profitability, is flawed. Companies that add unneeded workers will lose out to competitors who produce the same output at a lower cost.

Eliminating computers and reverting to paper files would create jobs. So would eliminating trucks and hiring people to deliver products on foot. Such steps would hardly be profitable or improve New Yorkers’ standard of living. This is another reason hundreds of grant-receiving companies failed to create the jobs they had promised. Some companies actually reduced their workforce, according to the Kearney report.

New York is entering a time when it can least afford politically motivated and unwise corporate favoritism. The state faces huge fixed costs due to debt service obligations, Medicaid entitlements, and pension and health benefit obligations for retiring public workers. Tax revenues, on the other hand, will be unpredictable because of fluctuations in the economy.

For most of the current decade tax revenues skyrocketed, but during these boom years New York’s governors, Republicans and Democrats alike, failed to pay down debt and slim down future obligations. The result is that the state faces a fiscal crisis.

The Empire State Development Corporation is not the answer to this crisis. It is a costly part of the problem. If knowledgeable business leaders have no interest in heading the agency, there’s a reason. Now is the time to redefine its mission.

The agency should advocate for tax and regulatory relief for all businesses and educate state lawmakers on the need for these changes. To restore the agency’s credibility and to spare taxpayers an unnecessary burden, the giveaways must stop.

Ms. McCaughey, the lieutenant governor of New York between 1995 and 1998, is an adjunct senior fellow at the Hudson Institute, and chairman of the Committee to Reduce Infection Deaths.