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.
