In the Border War of tax incentives, states and small business lose

Recently, the NPR podcast Planet Money shined a light on how states are using tax incentives to attract companies to their state. Kansas and Missouri spend millions of dollars each year to attract firms just on the other side of the border to relocate within their borders, hoping the jobs they bring will be a boon to their economy. However, this strategy doesn’t actually create jobs, and often fails to reward the types of companies that do have job creation potential.

The big myth

States try to attract big businesses to move their establishments and headquarters to their state, bringing the hundreds and possibly thousands of jobs that go with them. Politicians believe if a mega-business moves to their area, the business will provide job opportunities for its citizens.

It’s easy to see why this is a popular idea for state and local governments. The headlines proclaim “Corporation X brings 1,000 new jobs to Wyandotte County.” The issue in that statement is with the word new. Most of the time when a firm moves locations, it’s just shuffling jobs from one state to another, not creating new ones. While research tells us new businesses stoke the most net new job creation, still myths abound about the impact of large firms. There still remains the persistent idea that if a large Fortune 500-style company relocated to a given area, more people could find good jobs.

The problem with this approach is it can result in mutually assured destruction. A state may offer a company discounts on property taxes or corporate taxes as incentivizes for the firm to pack up and relocate there. However, when all jurisdictions play the game, firms can wait for the most attractive offer and move there. Not only that, firms will move multiple times, in short spans of time, to take advantage of these opportunities.

Not much bang, but a lot of bucks

The primary problem with these sort of tax incentive plans is the general wastefulness that they exude. Again, very few new jobs are created, in the aggregate, when a firm moves across state lines. It’s merely a shuffling of jobs from state to another. The podcast describes companies that move either take the employees with them or hire replacements in the new location.

Meanwhile, the cost is exorbitant. Nationally, spending on these tax incentive programs of all types exceeded $50 billion. While not all of these programs are specifically tailored to attract firms from other states, it is easy to see instances of states offering hefty sums of money in tax incentives to relocate.

Beyond the silliness of pretending this kind of economic development strategy is actually creating new jobs, states are also wasting opportunities to support the kinds of companies that do create new jobs; companies that are innovating and will be the business pillars of the future.

A (prisoner’s) dilemma

It is the young and growing companies that policymakers ought to focus on when designing a coherent economic development strategy. The kind of large tax incentive programs that grab headlines are overwhelmingly aimed at particular individual firms, firms that tend to be larger and older. These firms don’t represent the source of consistent new job creation that companies fewer than five years old are.

The Border War between Kansas and Missouri on tax incentives is costing both of these states hundreds of millions of dollars each year for a sliver of a gain (or loss) in jobs. While both states have realized the damage competing this directly has caused, they have struggled to cooperate with a tenable solution. Each has introduced its own version of a sort of cease-fire in regard to new tax incentives offered to firms to move from one state to another. Let’s hope that states, especially these two, realize the mutual benefit of cooperation on this long-overdue policy correction.