Local Subsidies for Business Relocation

It is not that often I get the opportunity to find something about taxes and markets in Kevin Drum's column that I agree with, but his guest blogger Paul Glastris has a good series of posts on state and local tax breaks, and even direct subsidies, for relocating businesses (first post here).  Glastris argues for the elimination of these tax breaks and subsidies, and I agree 100% with this conclusion, though not necesarily his legal justification for doing so (more on that later).

I have written a number of times about my frustration with a particular type of these subsidies - the public financing of stadiums for private sports teams (here, here, and here).  This stadium construction is usually undertaken as a result of corporate blackmail, where sports teams threaten to move unless they get a new stadium.  The dynamics of other tax breaks and subsidies to relocating businesses referred to by Glastris are usually similar, though these companies don't tend to have the monopsony power of sports franchises so they often get a smaller payout.

Why do local governments pay out huge incentive to corporations who after all have to put their business somewhere?  The answer is that they are caught in a classic prisoner's dilemma.  Basically, in this "game", each participant has individual incentives that seem to point to a certain set of actions.  Unfortunately, when players follow these incentives, the result is sub-optimized for everyone.

In this example, local authorities see a business that may move to town, and decide it is better to have it in their city with tax concessions than to have it in another city.  Since cities lose some of these battles and win some, and since cities that lose one battle tend to pay more to win the next one, the end result is that businesses end up being distributed fairly evenly, but cities have all given up huge tax concessions.  Clearly the ideal state, at least for city governments, is to not give any tax concessions at all.  In this case, businesses would likely still end up being distributed fairly evenly, but cities would not have given out tax breaks.

The only way to get to this end state is 1) have a philosophic change, with local citizens rejecting the use of government to affect relocation decisions (ie become libertarians!); 2) collude - have the council of mayors get together and sign a no new subsidy pledge or 3) have some higher authority police the local governments (that is the option explored in the Glastris article - can the US Government or courts constitutionally stop this). 

The Washington Monthly, in opposing these tax breaks, has a problem, though.  As good technocrats and liberal interventionists, they wholeheartedly support the government's right to regulate the hell out of business and commercial decision-making.  They can't, therefore, take the much cleaner libertarian argument I do, that the government should not be interfering in free, arms-length commercial decision-making at all. 

They are stuck with narrowly opposing just one kind of government interventionism (tax breaks to business) and this leads to a couple of problems in Galstris's argument.  The first is a consistency problem, which you can see in the attorney's letter Glastris quotes.  He argues in the first paragraph of his letter that these tax breaks violate the commerce clause because they unduly influence interstate commerce, then argues in his second paragraph that these tax breaks have no discernible influence on corporate decision making.  Well, if the second part is true, then their logic in the first part can't be true.

The other problem with their argument is that liberals want a commerce clause, as redefined by courts in the 1930's, as enabling massive government intervention, but in this case Glastris is trying to use it in its pre-1930's use, which was restrictive.  If the Glastris wants to take the position that the commerce clause limits state and local businesses from trying to change the decision-making and cost structure of businesses engaged in interstate commerce, wouldn't this same logic extend to making unconstitutional state-based business regulations?  If you can't give a local tax break to a certain industry, doesn't that mean you can't give a higher tax (say on lodging) to another industry?  The specific words of the Ohio decision referenced says:

... the tax scheme discriminates against interstate commerce by granting preferential treatment to in-state investment and activity.

I might ask, if you take this argument, wouldn't laws that make in-state investment and activity less attractive than other states also be unconstitutional? 

One final note.  As a libertarian, I have gone through phases on targeted tax breaks.  There have been times in my life when I have supported tax breaks of any kind to any person for any reason, by the logic that any reduction in taxation is a good thing.  I know there are many libertarians that take this position.  Over time, I have changed my mind.  First, targeted tax breaks seldom in practice reduce the overall tax burden - they tend to be made up somewhere else.  Second, these tax breaks tend to be gross examples of the kind of government coercive technocratic meddling in commerce and individual decision-making that I despise.  Almost always, they are trying to get individuals to do something they would not otherwise do, so in practice they tend to be distorting and carry all kinds of unintended consequences (as well as being philosophically repugnant).

  • Bill

    Interesting goose vs. gander argument concerning state regulation, but you miss the distinction between the taxing power and the police power. The federal courts have accepted some commerce clause arguments that limit the states' police power (e.g., state regulations limiting the length of tractor-trailers), but as a general matter, the balancing of commerce clause vs. police power has tended to give greater weight to the police power than a similar balancing of commerce clause vs. taxing power has given to the taxing power.
    There are no absolutes in constitutional law, just balances.

  • Max Lybbert

    I've gone back and forth on this one as well. Currently, however, I believe tax breaks are often used in an effort to make bad business decisions look like good ones, with very predictable results.

    I once worked for a manufacturing company that sent its partially-finished product to a plant in New York. Eventually New York's high cost of doing business caused the company to look at more business-friendly places, and New York offered some tax breaks to keep the company. I was surprised when the company decided to move operations to Georgia even though New York offered millions in tax incentives. The more I think about it, however, if NY was a bad place for the business, it would probably still be a bad place even if NY State promised to take less money out of the company's bank account.