The Wall Street Journal (WSJ) is reporting on a new study by Columbia
Business School economist Cailin Slattery and Princeton University economist
Owen Zidar that indicates (in the words of the WSJ), “State and local
governments across the U.S. spend at least $30 billion a year to attract and
keep companies, but the biggest deals generate little in the way of economic
benefits in return.”
The research calls into question the common practice of using narrow,
firm-specific tax breaks to attract businesses and boost employment. The
most notable recent policy of this sort is the infamous competition for
Amazon’s HQ2, which my home county of Arlington “won” by handing Amazon a welcome-wagon
present of $100,000 per job in state and local taxpayer funds.
If that feels a little like winning an economics Darwin Award, it is. The
authors note that the basic strategy is highly biased against smaller
firms, on average leads low-income areas to offer as much as four times as much
of a subsidy for the same jobs as higher-income areas, and does little to
generate broad economic growth in the region.
These conclusions really should not be a surprise for two reasons. First,
this is the very definition of the government picking winners, and the
empirical track record of governments doing so consistently well is thin to
non-existent. Second, to attract, say, Amazon to an area and keep other
government activities unchanged means that taxes will be higher on every other
business (or household) to make up the difference.
That discrepancy discriminates against the entrepreneurial start-up
firm that might otherwise launch in the area, and against the
maintenance of the infrastructure, education, and other attributes of the
area that would make it a natural location choice.
The oldest lesson in tax policy remains fundamental: broad base, low
rates. Preferential tax breaks narrow the base and raise the
rates. Simple.
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