It turns out that Marriott was never really interested in leaving Maryland. But it received a windfall for staying put.
With states still reeling from falling tax collections, here's an idea: End the practice of granting tax incentives to individual corporations as a means of fostering economic development.
Public finance experts have long criticized such targeted tax incentives as violating all the established principles of sound tax policy. Yet, these incentives have proliferated over the past quarter century. Hundreds of companies have received tax breaks worth billions of dollars. Alabama--a leader in the use of incentives--has granted Mercedes Benz more than $250 million in tax relief.
Some of this is understandable. Politicians want to encourage investment and create jobs, and they believe that the most expedient way of doing so is to lure companies through tax concessions. Politicians also don't want to lose jobs. A company that is talking about leaving--as Marriott did--is sure to be offered tax breaks to stay. Aware of this dynamic, corporations have used an army of consultants to broker deals for tax incentives. Essentially, corporations have learned to "game" the system.
When it comes to spurring economic growth, incentives are certainly the quick fix. Other ways of attracting companies--creating better schools and transportation systems--take years to develop. Tax incentives can be pushed through the legislature lickety-split and then, just as quickly, the governor and legislative leaders can be standing at a ribbon-cutting ceremony announcing a new manufacturing plant that will employ hundreds of citizens.
Despite its political allure, the targeted tax incentive is a poor policy choice. First, and most important at this time, it costs a lot of money. Even conservative estimates place the lost tax revenue at billions of dollars over the past decade. Curbing or ending their use could balance the budgets in many states.
Second, it's unnecessary. Corporations are far more interested in access to market, an educated workforce and labor costs than state tax burdens. As former U.S. Secretary of the Treasury Paul O'Neill said during his confirmation hearings: "I never made an investment decision based on the tax code. Good business people don't do something because of [tax] inducements." O'Neill led corporate giants International Paper and Alcoa.
Third, tax incentives are patently unfair. Typically, a corporation is offered significant tax breaks for creating a certain number of jobs and investing a certain amount of money in the state. But what of the companies that have already created the jobs and invested the money? They receive nothing. Similarly, corporations that threaten to leave a state often receive tax breaks for staying put. But what of the companies that do not have the nerve or guile to threaten to leave? The companies and individuals not receiving concessions end up paying more to support public services.
Fourth, tax-incentive programs suffer from a lack of accountability. Neither the public nor most political leaders know if the corporations are doing what they promised. There are often no guarantees that the recipients will create good-paying jobs or that a company won't close down the operation a year or two later.
Under the current system, government action is prompted by fear of losing jobs to other states, dubious promises and empty threats. The system prompts companies that do not receive incentives to lobby legislatures for similar breaks. And, the incentives run roughshod over the ideal that government should minimize its presence in the marketplace.
Competition among the states, based on low tax burdens and good public services, is a good thing. But providing tax breaks to particular companies in return for a promise of doing what most companies would do anyway violates all notions of good government. Ending the practice would result in a fairer, more efficient and more accountable public-finance system. It might just save states a little money as well.
