Competition among companies is productive, Arthur Rolnick says, but it can do more harm than good when cities and states compete to steal companies from each other.
Rolnick, director of research at the Federal Reserve Bank of Minneapolis, suggests that an economic war is raging among states as they try to outbid one another for businesses, offering billions of dollars in incentives to companies if they’ll set up shop within their borders.
At an economic development summit in Grand Forks, N.D., Rolnick said the practice-while it might benefit companies and some communities-is hurting the country overall.
“This competition…is counterproductive. It doesn’t create jobs. It moves them around,” Rolnick said.
Rolnick and Minneapolis Fed general counsel Melvin Burstein have authored a study in which they examine this escalating war and urge Congress to end it.
In their study the two say that state and local development officials often boast about the number of existing companies they’ve convinced to stay or the number of out-of-state ones they’ve convinced to relocate.
“As long as the subsidies and preferential taxes given to a business are worth less than the revenue the business will contribute to the state over its operating years, the citizens of the state are better off than if their state officials had not played this competitive game,” the pair write. “The state has more jobs and hence more tax revenue to pay for public goods than if it had not competed.”
But Rolnick and Burstein suggest there is evidence that states and cities in some cases are giving away more than they’re getting back-that tax money spent to entice an out-of-state business ends up exceeding the tax revenue the business generates.
The competition is damaging, they say, even when communities are able to keep existing companies from leaving.
By having to give companies subsidies and preferential taxes to keep them, Rolnick and Burstein write, “they have fewer resources to spend on public goods” like schools, streets and fire departments.
At the press conference, Rolnick said this competition between states is more than a century old. In the 19th Century, for instance, communities often vied to be along a railroad.
But whether it is because more states have formed economic development funds or because corporations have become more mobile or something else altogether, he said, the bidding war seems to have escalated in recent years.
Rolnick said the stakes clearly are high. Minnesota taxpayers recently put up between $55 million and $85 million to keep the Minnesota Timberwolves, even though the professional basketball team is one of the worst in the league.
States and cities cannot afford to sit idly by and not compete, he said, when a company is promising to create lots of jobs:
“As long as other states are competing, you have to compete.”
Rolnick and Burstein believe Congress-through its power to regulate interstate commerce-has the authority and ability to end this economic war.
Rolnick and Burstein would like to see Congress pass a bill instructing the U.S. Internal Revenue Service to treat incentives from states and communities as income for a company and taxed at 100 percent.
There is nothing wrong, said Rolnick, when states and cities try to outdo each other by lowering their taxes or increasing their services. But when governments reach into their pockets and dole out tax dollars to companies, he said, that competition overall is bad because it causes resources to be allocated less efficiently and diminishes their ability to provide public goods.
