On Ending Economic Bidding Wars Among the States

AS reported by the LA Times, a four state bidding war for Tesla’s battery plant was finally settled earlier this month, with Nevada ‘winning’ the bid.  In exchange for the electric car maker’s roughly 6,500 jobs, Nevada’s bid included:

Tesla will get more than $1.25 billion in tax breaks and other incentives.  That includes up to 20 years of exemptions from sales, payroll and property taxes; $125 million in tax credits Tesla can sell to other companies; and $8 million in electricity discounts.  The sum doesn’t include millions of dollars in infrastructure improvements–schools, highways and so on–that Nevada taxpayers will be shouldering.

The bidding wars are the result of states using tax incentive programs to lure businesses to their state.  While ubiquitous, these tax incentive programs are controversial, with the Nevada-Tesla deal being no exception. Generally, these programs and bidding wars are decried because states give away more in tax revenues than they receive in employment and economic growth.

On this problem and to resolve it, Adam Ozimek writes in Forbes:

No, I think the problem with these incentives is not that they are a rip-off for the localities that use them, but that they are a good deal for them. The problem is that they are a zero sum for the U.S. overall. Jobs gained somewhere are lost somewhere else, and there isn’t any efficiency gained in the process. States and localities aren’t competing by offering better governance overall, which would create a net economic benefit, but by cutting one-off special deals. Thus the only thing that is being generated is an appetite and capability for cronyism, and lower costs for large businesses relative to small ones.

It’s important to recognize that these deals make narrow economic sense because it has drastically different policy implications. If these incentives were bad deals, the solution would be to better inform states and localities. But because they represent a prisoners dilemma where the economically inefficient decision is locally optimal, it means something more is required. This might mean regional pacts, of federal action, or something else. I don’t have a good answer. But it’s important to recognize that the battle won’t be won with better information for decision makers.

While regional pacts have been entered into, there isn’t convincing evidence that they are working.  From a Good Jobs First report:

Fifteen years ago, the two states [Kansas and Missouri] signed an anti-poaching agreement that was an utter failure . . . A more recent attempt to halt the bitter jobs war was considered by the Missouri legislature in 2012 . . . The carrot-stick
combination legislation failed to pass.

. . . 

The [2006 study on the problems caused by economic bidding wars between North and South Carolina] recommended continuing a dialog “on intra-regional incentive practices” and hoped that the dialog would be taken even to the state level.  As a follow-up, Charlotte officials proposed an agreement to stop subsidizing the movement of jobs within the region.  However, that idea went nowhere when several counties, on both sides of the border, opposed it.”

Similar pacts in Ohio, as well as the Great Lakes’ region in the 1980s, and the New York-New Jersey-Connecticut region in the 1990s failed halt the economic bidding wars.  Because of this, some, such as Melvin Burstein and Arthur Rolnick twenty years ago, have long advocated the use of federal legislation.  While there are obvious Constitutional concerns to such legislation, Burstein and Rolnick expressly addressed the Constitutional issue in their argument:

A driving force in the nation’s movement from the Articles of Confederation to the Constitution was that the Articles did not provide a national economic union. The Annapolis Convention of 1786 was convened to discuss the removal of the impediments to commercial activity, both among the states and between the United States and foreign nations, under the Articles. It ended with a call for a meeting the following year to discuss changes to the Articles to correct the defects that adversely affected commerce. The 1787 meeting evolved into the Constitutional Convention as it became apparent that the commercial problems could not be remedied by simply amending the Articles.

Under the Articles, the states had freely engaged in destructive economic warfare by imposing all types of trade barriers against one another. To address this, James Madison, the recognized father of the Constitution, added the Commerce Clause to the Constitution, to help promote an economic union of the states. The Commerce Clause grants Congress the power to regulate “Commerce … among the several States. …”

Others, such as Kenneth Thomas, who writes extensively on the issue of tax incentive programs, agree that federal action is the only means to end the economic bidding wars.  The obvious problems are, given that this requires Congressional action, is the ability of such legislation to clear political and legal hurdles.

John Haskell

About John Haskell

John graduated from the University of Southern Maine with a degree in Political Science, and from the University of Maine School of Law. He has worked in both the public and private sectors, and currently, works with a small business services company in the Mid-Coast area.