Industry Payoffs Hurt Economy,
Fed Officials Say

Copyright 1995 News & Record (Greensboro, NC)
March 26, 1995
Staff Writer

Congress should prohibit the use of economic incentives nationally, argue two Federal Reserve bankers.

From the Statehouse in Raleigh to city hall in Greensboro, elected officials bemoan the existence of tax breaks and other incentives as an industrial recruitment tool.

But they all insist they have no choice but to use public money to attract private companies. Other cities and states offer incentives aggressively; in order to be competitive, they say, we must use them, too.

Melvin Burstein and Arthur Rolnick, vice presidents with the Federal Reserve Bank of Minneapolis, agree that no city or state wants to unilaterally back away from this country's intensifying economic-development arms race.

That's why Congress should pass legislation to prevent states from using subsidies and preferential taxes to attract and retain business, the bankers argue in an upcoming article in the Fed's annual report. The article was released recently to journalists.

The authors, whose thoughts are gaining national attention, contend that luring companies from state to state with incentives is harmful to the national economy in general, and to winning states in particular.

“While states spend billions of dollars to retain and attract businesses,” Burstein and Rolnick write, “they struggle to provide such public goods as schools and libraries, police and fire protection, and the roads, bridges and parks that are critical to the success of any community. Surely, something is wrong with this picture.”

The bankers are not against competition. When a state uses tax dollars to improve the public good through schools, libraries and infrastructure, they argue, it makes itself more attractive to business, and both the company and the public gain.

The bankers contend, however, that when states compete through tax incentives to specific companies, the overall economy suffers. “Competition has simply led states to give away a portion of their tax revenue to local businesses,'” they write. “Consequently, they have fewer resources to spend on public goods.”

And while economic developers argue that new companies pay for themselves through an expanded local tax base, the bankers contend that those people offering incentives frequently do not understand the businesses they are courting, how long they will operate, or how much tax revenue they will actually generate.

Since 1993, for example, North Carolina has given $350,000 in incentives to two companies that went out of business within months. In 1978 in Pennsylvania, the state gave $ 71 million in incentives to a Volkswagen factory that was to employ 20,000. Employment never reached 6,000, and the plant closed within 10 years.

Such examples help explain why Burstein and Rolnick are calling on Congress to prohibit the competition for business through tax incentives. Let states compete for business by investing tax dollars in communities and people, not individual companies, they argue.

“When competition turns into preferential treatment for specific businesses,” the bankers write, “it interferes with interstate commerce and undermines the national economic union by misallocating resources and causing states to provide too few public goods.”

Reprinted by permission of the News & Record.

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