One common argument for tax incentives is that in the competitive world of state economic development, states that fail to offer tax breaks to entice companies to invest or stay put will see investment and jobs shift elsewhere. Critics, such as Good Jobs First, view this “economic war among the states” as precisely the problem, amounting to a “ruinous zero-sum race to the bottom that benefits only footloose corporations while undermining state and local budgets, especially schools and infrastructure.”  Good Jobs First has blogged recently on two prominent examples where costly tax credit deals intended to lure jobs and investment have instead ended up leading to a major plant shutdown (Dell in North Carolina) and a criminal probe (film tax credits in Iowa).

Readers interested in a close-to-home example of the costs and drawbacks of state subsidy wars should check out a spirited new paper [PDF] by Jack Norman and Karen Royster, researchers at the Institute for Wisconsin’s Future, titled “The Twisted Saga of Mercury Marine”. Oklahomans may remember Mercury Marine as the marine engine manufacturing company that persuaded the Oklahoma Legislature to pass a bill this past session, SB 929, that made the company eligible for tax credits in return for keeping open  its plant in Stillwater. Mercury Marine then used this leverage to wrest concessions for its plant in Fond du Lac, Wisconsin, and promptly announced the closure of its Stillwater operations.

In addition to winning wage and benefit concessions from the union in Wisconsin to keep their jobs from moving to Oklahoma, the taxpayers of Fond du Lac and Wisconsin were persuaded to cough up as well. According to Norman and Royster:

• Fond du Lac is giving Mercury Marine a $50 million, low-interest publicly financed loan;
• To pay for the loan, Fond du Lac County Board imposed a countywide one-half percent sales tax;
• The Fond du Lac City Council approved a $3 million package of taxpayer-funded incentives;
• The state of Wisconsin is offering additional incentive package that has not yet been divulged.

This is a hefty price for a division of a larger company (Brunswick Corporation) which, Norman and Royster reveal, has seen its stock price fall 71 percent since 2005, laid off 5,300 North American workers,  forced pay freezes for current employees, and imposed steep pay cuts for new hires and employees back from layoffs – all the while continuing to  pay its CEO  in excess of $3 million in 2008.

At least in this instance, the Oklahoma Legislature prudently included a “clawback” provision in its subsidy bill which required Mercury Marine to return over $1 million in payments once it pulled up stakes for Wisconsin.  But while clawback clauses can provide some protection against being shaken down by a few businesses, might it not be time instead for Oklahoma to withdraw from the subsidies war? Oklahoma offers businesses a productive, hard-working labor force, a central location, a low cost-of-living, and among the lowest state and local taxes in the nation. Rather than further erode our tax base through deals that offer questionable returns, the dollars may be more productive if invested in the things that will make Oklahoma more broadly appealing to all businesses – for example, improving teacher quality, workforce development system, transportation infrastructure, and public health. That way we can stop allowing businesses to grab a slice of the pie before agreeing to sit down at the table.

Tax incentives of this sort are terrible tax policy. They violate every principle of sound taxation. Here is why. Tax incentives create horizontal inequities. If Harley Davidson gets a tax break for moving into Indiana, what do you tell the corporation that has been there for years? Tax incentives violate the rule that the tax laws should have as minimal effect on economic decision making as possible. When state governments try to influence where companies should operate, it is not much different from a Soviet planned economy.

Most importantly: tax incentives do not work. State taxes are a small part of the overall cost of doing business. Companies make location decisions based on labor costs and access to markets. Wherever Harley Davidson decides to move it won’t be because of the tax incentives. Those incentives will just be a sweet, albeit unnecessary, bonus.

As we noted last time, Congress  could take action under the Interstate Commerce clause to put an end to bidding wars between the states, but is unlikely to do so. Instead, we contend that the best way to avoid the worst policy outcomes is to ask  the same questions of tax incentive programs that we should ask about  all government programs:

• Is this tax incentive the best possible use of our public money?
• What will happen if we don’t offer the incentive?
• Who benefits from the incentive?
• Are there cheaper ways of achieving the same result?
• Is this an appropriate arena for government action?

We intend to continue monitoring policy developments in this domain while working towards the release of a report and hopefully public event as we get closer to the next legislative session

In the July 13 & 20 edition of Business Week, Jessica Silver-Greenburg asks Will Tax Breaks Boost State Jobs? She points out that incentives are a zero-sum game. Michigan might be better off for keeping a GM plant by spending $44 million in tax money, but the country is not.While state economic development officials defend the programs as essential to the state’s economic future,  Greg LeRoy of Good Jobs First, contends:

It’s a net-loss game for state and local governments. The only winners are the companies playing the tax game.

Warner also noted the ongoing analysis of state tax incentives by the Federal Reserve Bank of Minneapolis. In this 2007 testimony before Congress, bank senior vice-president Arthur J. Rolnick argued that incentives lead to wasteful competition between state and local governments that struggle to protect the public, educate children, and replace crumbling infrastructure. He called on Congress to  put an end to state subsidies.

It is now time for Congress to exercise its Commerce Clause power to end another economic war among the states. It is a war in which states are actively competing with one another for businesses by offering subsidies and preferential taxes.

We don’t expect Congress to end the incentive competition any time soon. So we hope Oklahomans will turn toward a thoughtful discussion of incentives. We should ask the same questions we ask about  all government programs:

• Is this tax incentive the best possible use of our public money?
• What will happen if we don’t offer the incentive?
• Who benefits from the incentive?
• Are there cheaper ways of achieving the same result?
• Is this an appropriate arena for government action?

The Incentive Review Committee has an important role to play in this discussion, but we need more involvement and a broader, more comprehensive approach. The state can help get the ball rolling by improving the transparency and accountability process for incentives. Earlier, we noted the recent addition of tax credits to the state’s Open Books web site, as well as the limitations. Now, we can learn in detail whose taxes are cut through the use of tax incentives. We hope to move toward a more comprehensive approach that tells us how much the credits cost altogether and what the state gains, if anything, through offering tax incentives. Then we can address those questions about whether we are using our public resources effectively.

Only 21 percent of employees in the largest 98 metro areas work within three miles of downtown, while over twice that share (45 percent) work more than 10 miles away from the city center.

Oklahoma’s major metropolitan areas are joining in this trend. Our jobs are not as spread out as most metro areas, but lately they have been spreading faster. Just under a quarter of Oklahoma City (23.9 percent) and Tulsa (23.1 percent) jobs are 10 or more miles from the city center, compared to the national average of 45 percent. From 1998-2006, Oklahoma City share of jobs in this “outer ring” has grown by 4.6 percentage points; in Tulsa it grew by 3.8 percentage points. Both are considerably higher than the national average growth of 2.6 percent.

Why should we care? The continuing outward movement of jobs has some substantial policy implications:

1. It’s costly. It costs 20 to 40 percent more to provide water and sewer infrastructure to less dense areas than to more compact areas. People spend more time and money commuting to outlying jobs than centrally located ones.
2. It reduces job opportunities, particularly for low-income working people. They tend to live in inner cities or older suburbs, while job growth is in newer and wealthier suburbs. Since the office park developments where jobs are growing don’t lend themselves to public transportation or even car-pooling, job sprawl leads to greater inequality and higher unemployment for low-income Americans.
3. It can squelch innovation. Studies show that more densely spaced jobs and employers lead to more interaction among businesses and employees and increased patenting. This can be seen locally in the significant medical advances and inventions resulting from Oklahoma City’s medical park development. This public-private partnership created a major new employment center just a few blocks from downtown.
4. It’s wasteful. Researchers have found that the “carbon footprint” of metropolitan areas can be related to the density and concentration of development, with lower-density regions consuming higher amounts of carbon per capita…shifting 60 to 90 percent of new growth to more compact forms of development would reduce VMT by 30 percent and decrease carbon dioxide emissions from transportation by 7 to 10 percent over the next 40 years.

Should we take policy action to reduce or reverse job sprawl? The Brookings study cautions that outward movement is a long term trend that is likely to pick up again as the economy recovers. They suggest, though, that coherent policies can slow down the spread of jobs and the resulting costs and inequities. Oklahoma typically has tolerated and even encouraged suburban sprawl and it would require major shifts in thinking to switch directions. Still, we could save ourselves some time and money and improve economic opportunities by considering:

• Putting the brakes on widening freeways to the suburbs after the current round. If we shift these resources to road maintenance and public transit we’ll save money, time, and axles!
• Pursuing public transit, including commuter rail in the metro areas. Transit stations help concentrate jobs and shopping and make it easy and economical for everybody to access them.
• Stopping spreading state offices and agencies to the suburbs. This just increases driving time and cuts off some of our neediest workers from accessing jobs with good pay and benefits.
• Expanding the use of creative public financing to build central city employment opportunities. The new Devon complex in Oklahoma City should be the next step, not the last.

Cities have been expanding since they were first created and won’t stop anytime soon. Perhaps, though, the time has come to put more effort into making them better, not just bigger.