Saint Paul Pioneer Press

A no-subsidy truce in bidding wars between cities is intriguing proposal

Published Wednesday, February 26, 1997, in the Pioneer Press.
Reprinted by permission.

D. J. Tice

The subsidy games continue, with a second pitch unleashed for a publicly funded baseball stadium. Meanwhile, rather quieter debate surrounds a proposed public subsidy for Lawson Software -- as if Lawson were a seedy base runner, effortlessly stealing second while everyone is distracted.

But the Lawson subsidy bears watching. It's a high, hard fastball of a subsidy—exactly the sort of relocation bonus for an individual business that strikes many economists as wasteful and unhealthy.

Lawson is a fast-growing software firm in Minneapolis. Needing to expand, the company began exploring its options last year. It talked to Minneapolis, St. Paul and suburban communities.

St. Paul has now offered a $24 million subsidy to help build a new downtown office tower in which Lawson would become the main tenant. Minneapolis is still making proposals, too.

The effort to attract Lawson and its 800 jobs to St. Paul set off an argument between Mayor Norm Coleman and City Council President/former mayoral candidate Dave Thune. That's not terribly difficult to do.

But Thune's mystifying political strategy aside, there are legitimate questions about whether subsidies like Lawson's make any broad public-policy sense.

Assume Lawson eventually receives a subsidy from some local community. The economy of the Twin Cities area as a whole will have gained nothing. Lawson is already here.

Yet simply by putting up for bids the question of which local political subdivision it will henceforth occupy, the company will have extracted a substantial taxpayer subsidy. For the Twin Cities community as a whole, this will represent a net reduction of total public revenue. It must eventually produce higher taxes and/or poorer public services for other Twin Cities taxpayers, including other businesses.

Such, anyway, is the indictment of intergovernmental bidding wars offered by Art Rolnick, research director at the Minneapolis Federal Reserve Bank. Rolnick is determined to compel a cease-fire in the subsidy wars among states and cities—for sports teams or any other businesses.

Rolnick wants Congress to tax away the value of special state and local subsidies to individual businesses. He calls the Lawson deal a "classic example'' of wasteful competition.

Governments should certainly "compete,'' Rolnick says. But they should compete only in their efforts to provide quality public services at reasonable cost to all taxpayers and all businesses. Allowing mobile individual firms to extract special deals by threatening to move across (economically) artificial political boundaries simply squanders public funds while inspiring inefficient business decisions.

And yet this isn't the whole story. Until Congress imposes a truce in the intergovernmental bidding wars, even Rolnick can't blame local officials such as Coleman for responding to opportunities to attract business development.

More important, one wonders whether Rolnick's vision of a subsidy-free

economy can really work, unless subsidies in all their forms can be eliminated. Frequently, the trouble for cities is that a tangled array of subsidies and subsidy-like artificial advantages favor commercial development in outlying suburbs.

The mere proximity of a large metropolitan area, with all its services and business opportunities, is a kind of "subsidy'' to business migration toward cheap, unoccupied land on the urban fringe. Tax-funded connections to the road, sewer and infrastructure system of the urban region is a more direct subsidy.

Rolnick acknowledges these subsidies and pseudo-subsidies for suburban sprawl. But he argues such advantages are available to all businesses, not only to individual firms cutting special deals. He says the core cities also enjoy unique attractions.

Anyway, Rolnick says, policymakers should begin by banning special subsidies for individual firms. Later they can eliminate inefficient general subsidies and ensure that all development choices pay their true infrastructure costs.

Sounds good. But can all such "subsidies'' be eliminated? Can central cities compete without being able to offer assistance with acquiring and clearing land, providing parking and so on? If cities can't mitigate their inherent cost disadvantages, it would seem that suburbia, from an individual firm's point of view, would frequently offer the blessings of an urban location while core regions house the burdens.

The question may be whether there is a clear "public good'' (a good the market alone can't value and provide) in ensuring that downtowns and mature suburbs have a shot at attracting new development -- that we don't just inexorably abandon already developed areas to decay. Because psychology and "momentum'' play their roles in the very human enterprise that is business, it's possible that subsidies and local government "pump-priming'' must play a role in equalizing opportunity among communities.

Rolnick's arguments are important and persuasive. But the complex maladies of metropolitan economies may not always respond to a pure no-subsidy prescription.

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