How About an Interstate Compact to Phase Out Corporate Incentives?

Michael D. Farren

by  James A. Bacon

The Northam administration is enamored with the idea of joining interstate compacts to combat climate change. The Regional Greenhouse Gas Initiative (RGGI) is likely to be enacted, and the Transportation and Climate Initiative has gotten serious attention. How about an interstate compact to limit the practice of granting subsidies and tax breaks as economic development incentives?

Michael D. Farren, a Mercatus Center scholar at George Mason University, presented the idea recently in testimony to the U.S. House Committee on Revenue and Finance.

Economic-development subsidies represent a net loss for state/local governments, Farren said, citing a vast scholarly literature on the subject. Yet governments continue to resort to subsidies, tax breaks, and other giveaways in order to stay competitive with other states that offer subsidies to win economic-development projects.

In an interstate compact, an idea enshrined in the U.S. Constitution, two or more states could agree to limit the giveaways when competing against one another, Farren suggests.
It’s a great idea in the abstract. But the idea remains just that — abstract. Farren’s presentation provided few clues on how such a compact would be constructed.

An interstate compact would be easiest to apply to projects where only two states are under consideration. Say, for example, Wal-Mart wanted to build a new distribution center to serve the Bristol/Johnson City/Kingsport metropolitan area and could choose a location in either Tennessee and Virginia. An interstate compact might prevent the two states and their localities from engaging in a bidding war to win the project. Wal-Mart would build the warehouse where it made the most economic sense to do so.

What about a project where the corporation has more latitude about where to locate — say, a truck assembly plant? If Tennessee and Virginia had a compact not to compete with subsidies, would it still apply if North Carolina or Georgia were in the running? Would such a compact cripple Virginia’s ability to compete?

Perhaps states could circumvent that issue by negotiating regional interstate compacts. If Virginia finds that it competes mainly with North Carolina, South Carolina, Georgia and Tennessee for manufacturing jobs, for example, it could pursue an interstate compact with those states. But what if competing states differ for different industries? In the competition for an IT firm, Virginia’s peers might be Massachusetts, Texas, Washington, and California. Would it make sense to negotiate industry-specific compacts? How many would be needed?

Frankly, I don’t know if the idea is workable. But the practice of granting special subsidies and tax breaks to individual corporations is a necessary evil. We should seek to end it, if at all possible. I think the idea is worth exploring.

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11 responses to “How About an Interstate Compact to Phase Out Corporate Incentives?”

  1. Steve Haner Avatar
    Steve Haner

    It would probably have to be like that silly National Popular Vote proposal, only going into effect when enough states sign on. No small group of states will willingly “disarm” in this ongoing contest, leaving others fully armed. But its an idea. I think Congress could also act, for once a proper use of its authority over interstate commerce.

    1. djrippert Avatar

      Funny you should mention Congress …

      Interestingly from the 1/31/2020 article …

      “For example, my research with Anne Philpot found that Virginia, rather than offering Amazon $845 million in subsidies for HQ2, could instead have reduced corporate income taxes for all businesses by 5.6 percent.”

  2. Peter Galuszka Avatar
    Peter Galuszka

    I would think that this would work only if all states and cities did it.

  3. LarrytheG Avatar

    eh… got a “cartel” or “monopoly” feel to it…

    but also, when you look JUST at the incentive money – it’s not about that as much as it is about direct jobs and spin off jobs as well as the “anchor” effect.

    Amazon is worth way more than the incentives given up and it does depend on the locality. New York did not “need” them and perhaps neither does NoVa but looking back at all the cities that tried to get Amazon… I can’t see all those cities agreeing to a “compact” to not offer Amazon incentives and if they did promise, then I’d be looking for under-the-table stuff…

  4. Dick Hall-Sizemore Avatar
    Dick Hall-Sizemore

    Your post reveals why states would not agree to this. Although Mr. Farren presented a “vast” amount of literature supporting the argument that subsidies represent a net loss for states and localities, you don’t seem to buy into that argument. You ask if entering into a compact with Tennessee would cripple Virginia’s ability to compete against North Carolina if it were in the running for the same project. Why would it matter if Virginia could not compete against North Carolina if subsidies result in a net loss?

    If a state chooses not to offer a subsidy or tax break and another state does make such an offer and the company selects that other state, the state not making an offer will be mercilessly pilloried.

  5. WayneS Avatar

    “Economic-development subsidies represent a net loss for state/local governments, Farren said, citing a vast scholarly literature on the subject. ”

    I find that difficult to believe. What state or locality would knowingly enter in to a deal (any deal) that represented a net loss for them?

    Unless payoffs to corrupt politicians are involved, of course.

  6. Jim Loving Avatar
    Jim Loving

    Current incentive structures for ED are indeed a “race to the bottom.” As Richard Florida points out, these are more “political decisions” than economic decisions. The major reasons business locate somewhere are two: availability of talent and quality of life.

    The state compact idea is worth a try. Just another tool in the toolkit.

    Another one is to include ED strategies that encourage locally-regionally owned businesses that stay local, buy local, and promote locally. This is part of a larger strategy of building greater Community Wealth. ED of the future, when also factoring in the need for greater resilience, will need to do both.

  7. Jane Twitmyer Avatar
    Jane Twitmyer

    There are several articles in The Hill about how the issue rose to the top because of Amazon’s HQ2 search. Across the nation, 238 cities prostrated themselves for Amazon’s business, in some cases offering the company free land or to even change their own names.

    We all know Virginia and New York won. The “Virginia House spent just nine minutes in debate … before voting overwhelmingly to give Amazon up to $750 million in subsidies over 15 years for the company’s planned headquarters facility in Arlington.” The vote tally was 86-16 according the then WashPost last January.

    “The Virginia bill provides for cash grants to Amazon of $22,000 per new full-time job for the first 25,000 jobs, for a maximum of $550 million. After that, grants of $15,564 per new job would be issued for up to 12,850 additional jobs, for a total of $200 million. The jobs must pay an average of $150,000 per year.”

    And shortly after the announcement there were other announcements… “Virginia Tech will build a 1 million-square-foot graduate tech campus in Alexandria, Virginia, and George Mason University unveiled an Institute for Digital InnovAtion and School of Computing (IDIA) to support the retail giant’s move to the region.

    Here are some other competitions listed in The Hill …. “The price tags were steep: Washington State approved an incentive package worth $8.7 billion to keep Boeing jobs in the Seattle area. New York offered Alcoa a package worth $5.6 billion in 2007. Nevada handed Tesla a $1.3 billion package in exchange for a high-tech gigafactory.” And the worst of it is that the “big corporations that benefit from tax incentives also carry significant political clout.”

    Many believe “The best path forward is to leave corporate handouts in the past.” But nobody thinks Congress will be able to do anything at the federal level. However, some “lawmakers are re-prioritizing, spending more on quality of life issues that would attract a trained and talented workforce rather than on the incentives meant to lure the companies. At least ten states are considering legislation to rein in their government’s ability to offer incentive packages. The bills they are considering, sponsored by both Democratic and Republican legislators, would create an interstate compact in which states agree not to woo businesses from other states with tax incentives.”

    Interstate cooperation sounds better than nothing. So does spending on community benefits as attractions rather than direct subsidies. Steve Bullock, Gov of Montana, has said that “Ultimately, [this race to the bottom] can also mean gutting long-term tax revenues.” That is the real problem.

  8. TooManyRegulations Avatar

    Nothing burns my tail more than a fire about 3′ high… and politicians taxing my hard-earned property to give away to competitors. These giveaways are nothing more than mutually assured self destruction.

    But, when it comes to politics you can throw all the economic logic out the window. These packages are more about “job announcements”, or, more abstractly, the perverse incentive of politicians to be able to claim they are “doing something” or “here to help (you work through some issue they created.)”

    Maybe the solution here is to turn the idea around… interstate compacts to promote economic development with the states participating in the compact… pool resources, somehow sharing “the rewards.” Something like multistate lottery. Logic here is that those states with the largest resource pools would attract investment, but would also significantly slow the race to the bottom by reducing the conquer and divide strategy of large corporations.

  9. LarrytheG Avatar

    There’s actually quite a few interstate compacts and even some that are for economic development:

  10. […] formed that allow for teacher licensing, emergency licensure of EMS personnel, election reform, and curbing business tax incentives. It’s likely that more states and territories will continue to opt into these wide ranging […]

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