Economic Development

A Brake on Breaks?

States still like giving tax subsidies to big corporations, but they get nervous when their localities do it.
by | June 2005

It remains to be seen whether the U.S. Supreme Court will take up Cuno v. DaimlerChrysler. That's the case in which a lower court invalidated Ohio's ability to provide tax breaks to large in-state businesses, on the grounds that it was unfair to companies elsewhere. In the meantime, however, copycat lawsuits based on the case are springing up all over. "These cases will spread," Peter Enrich, the Northeastern University law professor who argued Cuno, told a recent meeting of state legislators, "and hopefully relieve you of the pressure you face to give tax breaks you know are not really serving a purpose."

Enrich's thesis--that public officials want to be stopped before they give away again--is fallacious. Governors and economic development directors actually crave, and will fight for, the ability to land big fish with the lure of a tax break.

The reasons are obvious. Although studies indicate that businesses lured with tax credits or deferrals don't produce the number of jobs promised, they do produce some. Equally important, they provide wonderful excuses for holding news conferences and ribbon cuttings. It's good for the politicians, it's good for the companies and it's good for the lobbyists who get to take credit for securing the breaks.

"What they're really fighting over is job announcements and not net jobs," says Michael LaFaive of the Mackinac Center for Public Policy, who just released a study indicating that the corporate tax benefits Michigan has negotiated over the past decade have generated less than 40 percent of the jobs originally promised.

So states are going to continue doling out tax subsidies as long as courts let them. What the states aren't so happy about is watching their own localities practice the same policy. Arizona, for example, has a new law requiring city councils to secure a two-thirds vote in order to confer tax subsidies on retailers. The legislature debated another bill that would have blocked local incentives entirely.

In hopes of staving off the state's attacks, the cities of Phoenix, Chandler and Tempe last month entered into Arizona's first local non- aggression pact, declaring 25 square miles along their mutual boundaries off-limits to any corporate incentives. "Unfortunately, we've had a history of what we call border wars in this area," says Chandler Mayor Boyd Dunn. Still, he says, incentives remain a needed tool and the state should back off. "The importance of the non- incentive agreement was to send a message that this is an issue of local control."

No one at any level of government, it seems, wants to be told not to give away the store.


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