How the tax incentives war puts states in a terrible bargaining position

Last week, 17 of the top business executives from the Kansas City area made an unexpected request to the governors of Kansas and Missouri – they asked to end tax incentives for their businesses. The letter describes competing incentives as inciting an “economic border war,” where companies get escalating payoffs to move back and forth across state lines, with no benefit to the larger community. The business leaders wrote:

At a time of severe fiscal constraint the effect to the states is that one state loses tax revenue, while the other forgives it. The states are being pitted against each other and the only real winner is the business who is “incentive shopping” to reduce costs. The losers are the taxpayers who must provide services to those who are not paying for them.

The situation in Kansas City is only the most dramatic example of a nationwide problem. When state governments come to the table ready to tailor their tax policies to the desires of a single industry or firm, it is like playing poker with our cards face up. When a company knows that claiming to need a tax incentive will help them pay less taxes, of course they will say they need it, whether true or not. The result is a destructive race to the bottom, where businesses play states against each other and even against their own employees.

We saw a recent example in Oklahoma with the Mercury Marine company. The company initially promised to bring more operations to Stillwater and convinced the legislature to offer them more than $1 million in Oklahoma taxpayer dollars. Meanwhile, the company used Oklahoma as leverage against its plant in Wisconsin, where the company had been founded.

After winning a $50 million low-interest loan to be paid for by a countywide sales tax increase, another $3 million in incentives from the city of Fond du Lac, and significant wage and benefit concessions from its employees, the company ended up closing down Oklahoma operations to go to Wisconsin. It’s unclear whether the company ever intended to move to Oklahoma, or if it was simply using us to extract money from its home state.

Even broader based tax reductions show little evidence of attracting new businesses. Nationwide, state and local taxes on businesses (corporate income taxes, sales taxes, and local property taxes) make up on average only about 1.8 percent of business costs. Tax variation between states and their impact on business profits are dwarfed by factors like cost-of-living, quality of the workforce, access to transportation and supply lines, and proximity of customers, not to mention cultural and historical ties to a particular location. As stated by economist Robert G Lynch in a report that examined hundreds of studies on this issue, “The bottom line is that state and local taxes, at their current low levels, may be largely irrelevant to business investment decisions.”

So what does determine economic outcomes? As a report on the effects of right-to-work in Oklahoma shows, the state’s economy closely follows regional and national trends regardless of state policy differences. Certainly state differences exist, but those are easily explained by economic differences unrelated to taxation. Rather than low taxes, today’s rising cities are attracting people with shorter commutes, more affordable housing, and the simple fact that there is more room to grow. According to a Forbes report on the fastest-growing cities (which included OKC):

Over the past decade, the biggest migration of Americans has been to cities with between 100,000 and 1 million residents. In contrast, notes demographer Wendell Cox, regions with more than 10 million residents suffered a 10% rate of net outmigration, and those between 5 million and 10 million lost a net 2.4%.

Often a region prospers because it happens to be home to industries on the upswing, or falters because it relies on industries past their prime (see: Detroit). Unfortunately economic growth can be fickle, but because of that, it makes far more sense to invest in a strong general infrastructure and workforce ready for whatever comes our way. For example, Oklahoma has benefited due to federal government expansion during wartime, not to mention significant public investments in Oklahoma City that make it a more exciting place to live.

Rather than going hat in hand to out-of-state businesses, ready to trade public resources for jobs that may only last until they get a better offer, those dollars are better spent on infrastructure, public safety, education, workforce development, and other measures that directly improve the quality-of-life and competitiveness of all Oklahomans.