Business Incentives – A Zero Sum Game (For Taxpayers)

As reported in The New York Times, states are racing to the bottom to give tax incentives and other goodies to businesses in order to lure them to their areas.

KANSAS CITY, Mo. — This city, sharing a name with one state but settled in another, has a long history of ugly border skirmishes dating back to the Civil War. And even today, the annual football showdown here between the University of Kansas and the University of Missouri is referred to as “The Border War.”

But the interstate rivalry has grown fierce on a new battlefield — business — as the two states stage cross-border raids and entice companies with generous incentives to move a few miles and resettle on the other side.

Though some say such moves strengthen communities with new jobs and tax revenue, a growing chorus of leaders on both sides are wondering about the point of it all, warning that the efforts serve only to help private companies at taxpayer expense. Even some beneficiaries confess surprise at neighbors’ competing with such rancor.

“In all candor, it’s unusual and a little disconcerting,” said Gerry Lopez, chief executive of AMC Entertainment, the movie theater chain, which is being offered incentives to move to Kansas from Missouri. “I do wonder whether this is an appropriate role for government to be playing.

This situation is very familiar to Illinois taxpayers. Remember the millions of dollars in incentives given to Sears when they moved to Hoffman Estate in 1989 – not to mention the land. The Heartland Institute looked at the Sears subsidies in 2009:

Hoffman Estates jumped into the tax subsidies quagmire in 1989 when it helped Sears move 5,000 jobs out of Chicago to its current headquarters, largely through tax increment financing. Sears has received more than $200 million in TIF subsidies taken from schools and other local governments. To cover the lost tax money, local governments force others to pay more.

Economics professors Richard F. Dye of Lake Forest College and David F. Merriman of Loyola University of Chicago studied 235 communities in northeast Illinois—including Hoffman Estates—and found those with TIF projects “actually grew more slowly than municipalities that did not use TIF.” Village officials have described the Sears Centre as “a great community asset.” In fact it is a great drain on the community.

So who’s right? Is it sound economic development policy to give companies with billions of dollars in revenues tax breaks to move their operations? The New York Times article goes on to quote Art Hall, director of the Center for Applied Economics at the University of Kansas School of Business

He said the debate over such programs was difficult to referee because much of the information about the incentives was not public. He was doubtful that such programs made economic sense. “What you’ve really done is set up a situation to be abused by businesses,” Mr. Hall said.

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