Competition for business has become a high stakes poker game. To
bring
professional football back to St. Louis, the city offered the owners of
the Los
Angeles Rams an incentive deal worth $720 million. Mercedes Benz
located its
new auto plant in Alabama because the state and local governments came
up with
a package of incentives worth $250 million. Last year, Amarillo offered
$8
million in cash to any company that would move to Amarillo and create
700
jobs.
Is this kind of competition good? That depends on whom you ask.
Businesses
love it. The Federal Reserve Bank of Minneapolis (FRBM) hates it. One of 12 regional federal reserve banks that set
monetary
policy in the U.S., the FRBM just released a 1994 annual report which
says that
“[w]hen states compete through subsidies and preferential taxes for
specific businesses, the overall economy suffers… Competition has
simply led
states to give away a portion of their tax revenue to local businesses;
consequently, they have fewer resources to spend on public goods, and
the
country as a whole has too few public goods.”
The FRBM argues that the only way to bust the poker game is for
Congress to
prohibit subsidies and preferential tax treatment for busi-nesses. The
FRBM
says that James Madison, one of the principal architects of the
Constitution,
saw that the 13 original states were imposing trade barriers on each
other. To
prevent economic warfare among the states, Madison added the
Commerce Clause to the Constitution, allowing Congress to “regulate commerce with foreign nations and among the several
States.”
The FRBM says that “Only Congress, with its sweeping Constitution
powers,
particularly under the Commerce Clause, has the ability to end this
economic
war among the states. And it is time for Congress to act.”
Perhaps the folks at the FBRM read the April 11 issue of the
Wall
Street Journal, which carried a front-page article about the perils
of tax
incentives. “By luring companies away from California and the East,
onetime
backwaters such as Chandler, Ariz., and Round Rock, Texas, are suddenly
boom-ing,” writes WSJ reporter Robert Tomsho. “But such
communities are
discovering that economic-development battles can exact a stiff price,
even for
the victors.”
The city of Rio Rancho, located on the outskirts of Albuquerque,
New
Mexico, has attracted more than half a dozen new companies, including
computer
chip maker Intel Corporation. All the companies got tax incentives, but
Intel
won the jackpot: a $114 million deal that exempts the $11 billion
company
from property taxes. That type of industrial deal-making has led to a
local
boom. Since 1980, Rio Rancho’s population has grown from 8,000 to
44,000. But
the growth has occurred at the expense of the schools. Tomsho writes
that the
city has “yet to build a high school. Some elementary and junior-high
facilities are packed to twice capacity. Portable classrooms fill
dusty
playgrounds.” In some cases, the facilities are so bad that students
are using
outdoor toilets.
The city recently created a school district. In 1994, property
taxes on a
$100,000 home nearly doubled. State law prevents the city from raising
property
taxes any further. The city is now asking the state legislature for
help. It
wants the state to come up with $29 million so that it can build new
schools.
Tomsho also points to Maury County, Tennessee, as an example
of tax
incentives gone bad. In the mid-1980s, the county gave abatements to General Motors. In return, GM built its Saturn factory
in the
county. Today, the local school district needs 100 new classrooms
to meet
state standards.
Local boosters say Austin needs to offer tax abatements so the
city can
compete in the new high-stakes card game. Perhaps in-stead of giving handouts
to big
corporations, Austin should sit this hand out.
This article appears in May 5 • 1995 and May 5 • 1995 (Cover).