March 20, 1995
Encouraging economic growth is a key objective of all governments, best pursued by providing quality public services while keeping taxes and business costs in line.
Unfortunately, in recent decades, state and local governments in America have been tempted by a short cut. They have used special tax breaks and subsidies to pirate existing businesses from one another. This forces the target governments to respond with special favors of their own.
Minnesota has participated vigorously in such bidding wars (think of Northwest Airlines, Fingerhut and many more). Often, there is no choice, as no government can sit idly by while major employers or economic assets are lured away.
But last week two eminent local economic analysts argued forcefully that intergovernmental business piracy is economically harmful, and that Congress should put a stop to it. Melvin Burstein, general counsel of the Federal Reserve Bank of Minneapolis, and Arthur Rolnick, the bank's research director, make a compelling case that “even though it is rational for individual states to compete for specific businesses, the overall economy is worse off for their efforts.”
Why? Two reasons: (1) This kind of competition results in a net loss of tax revenue (if it didn't, companies wouldn't move), which means governments will have to tax other businesses more or provide lower quality services; (2) government bribes lead businesses to move to locations that are less than ideal for them, producing lower productivity.
Importantly, Burstein and Rolnick note that “business climate” competition among states—competing in efforts to keep business costs low while providing quality services—is quite desirable. But special breaks for individual companies do nothing but harm in the long run.
This economic logic is unassailable. Destructive interstate competition merits congressional intervention.
Reprinted with permission of the Pioneer Press.