Three possible solutions to “American cities and states spend[ing] up to $90 billion in tax breaks and cash grants” to companies

After discussing why American communities spend so much money and effort to attract companies, Derek Thompson proposes four solutions:

First, Congress could pass a national law banning this sort of corporate bribery. Mark Funkhouser, a former mayor of Kansas City, Missouri, envisions the law as the domestic version of the Foreign Corrupt Practices Act, which makes it illegal for Americans to bribe foreign officials.

It’s not entirely clear whether that would pass constitutional muster. The Supreme Court hasn’t ruled decisively on whether the Commerce Clause gives Washington the authority to ban interstate bidding wars. In the 2006 Supreme Court case DaimlerChrysler Corp. v. Cuno, Ohio taxpayers sued the state after it paid the automaker DaimlerChrysler about $280 million in tax exemptions and tax credits. The Sixth Circuit Court sided with the taxpayers, striking down Ohio’s subsidy as a violation of the Commerce Clause. But the Supreme Court avoided a final judgment on the matter by finding unanimously that the plaintiffs did not have standing to bring the suit.

Second, Congress could make corporate subsidies less valuable by threatening to tax state or local incentives as a special kind of income. “Congress should institute a federal tax of 100 percent” on corporate subsidies, Jack Markell, a former governor of Delaware, wrote in The New York Times. “This would not include investments in public infrastructure, work force development or other investments that can attract employers while also providing a significant long-term benefit to taxpayers.” Taxing subsidies would hopefully force cities to change their economic-development strategies, from importing other states’ companies to building their own—through investing in research universities, building more housing, and welcoming immigrants, since foreign-born Americans have the highest rates of entrepreneurship.

Finally, the federal government could actively discourage the culture of corporate subsidies by yelling, screaming, and penny-pinching. As Meagan Day wrote in Jacobin, “The federal government could withhold funds from governors and mayors who threaten to poach jobs from other states, or who won’t disclose their incentive packages.” Washington tends to look on quietly when cash-strapped states break the bank to welcome glitzy tech firms. But an attitude change at the top could trickle down to the local level. Donald Trump, or another president, could have made a national address after the HQ2 announcement slamming Amazon for soliciting taxpayer funds in a silent auction. He could have called a summit to encourage the nation’s mayors and governors to offer the same tax subsidy for HQ2—zero dollars and zero cents. Even a tweet could suffice: “7 BILLION FOR BEZOS?? Trillion-dollar companies in America don’t need our welfare! Bad!”

Interesting options. I have argued before that this practice leads to a race to the bottom between communities. They can even pit suburbs and cities within the same region against each other.I wonder if both businesses and communities would complain. Businesses would want to get the best deal they can. Why shouldn’t they be able to compare different offers? They may go as far as to argue that the tax breaks help them be more profitable which means they can then spread more wealth to workers and investors. Communities might prefer to keep competing because it gives them a chance to entice a business that otherwise might not move there. If tax breaks became less valuable, would certain industries and kinds of firms gather in a limited number of attractive locations? Open competitions for companies gives communities a chance to get their name out there and build a brand. Furthermore, these tax break opportunities allow local officials to show that they are making a concerted effort to bring jobs to an area.

I do not see this practice stopping soon even as we see the fallout of the Amazon race. While it may take time for the federal government to step in, communities could decide to opt out from such competitions. What would happen if in a situation like the Amazon one, the major contenders refuse to pander to the corporation?

One thought on “Three possible solutions to “American cities and states spend[ing] up to $90 billion in tax breaks and cash grants” to companies

  1. Pingback: Minor league baseball stadiums are not good for economic development | Legally Sociable

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