The economic war between the states

November 06, 1995|By Neal R. Peirce

FROM THE LEFT, the center and the right, from scholars, economists and think tanks, the word is the same:

There's little gain but immense peril in America's state-eat-state civil war over buying jobs with taxpayers' money. The sooner the subsidies to footloose industries stop, the better off we'll all be.

Latest to join the fray is the conservative, free-market-oriented Mackinac Center for Public Policy in Midland, Michigan. Working with the Constitutional Heritage Institute in Nebraska and the Heartland Institute in Illinois, the Mackinac Center signed up 100 Midwestern economists calling for an early end to ''the economic war between the states.''

Tax subsidies, said the group, run counter to healthy and even-handed economic growth because existing businesses and their workers are unfairly penalized through higher taxes to subsidize large firms looking for greener pastures.

What's more, they charged, empirical research shows the firms targeted for subsidies ''add little if anything to job creation.'' The subsidies are condemned as ''state-level industrial policies that attempt to pick winners and losers'' based on politics rather than fair economic competition.

''We're just bleeding each other,'' said Charles Van Eaton, chairman of the Hillsdale (Mich.) College economics department. ''The problem is that sooner or later, tax abatement becomes a zero-sum game.''

While Mackinac-led economists are asking states, not the federal government, to police excesses, the demand for federal intervention is growing. Only a federal remedy, says Greg LeRoy, policy consultant for the liberal-oriented Chicago-based Federation for Industrial Retention & Renewal, will avert ''chaos'' in basic industries and ''ruin'' for local tax bases.

Two mainstream economists -- Marvin Burstein and Arthur Rolnick of the Federal Reserve Bank of Minneapolis -- have joined the cry for a federal remedy. They quote Supreme Court Justice Benjamin Cardozo, who said the Constitution ''was framed upon the theory that the peoples of the several states must sink or swim together, and that in the long run prosperity and salvation are in union and not division.''

Surely, write Messrs. Burstein and Rolnick in the Northeast-Midwest Economic Review, something's terribly wrong if states spend billions competing to attract or retain businesses, even when they are struggling to fund such clear public goods as schools and libraries, police and fire protection, roads, bridges and parks.

The economists' solution: Use the commerce clause of the Constitution to end economic war among the states, making a finding (to which the Supreme Court would almost certainly defer) that the subsidies affect interstate commerce. States giving targeted subsidies and tax breaks could be threatened with loss of tax-exempt status for their public debt, or loss of federal-aid funds.

Customized tax breaks

What would presumably be forbidden would be any kind of subsidy or tax break -- from an outright grant to state or local government loans or prepaid worker training -- that gets decided case-by-case and thus can go to an individual, favored firm.

States and localities would be left, of course, with the dozens of ways to favor industry across the board, whether by low taxes (corporate or personal or sales) or tax exemption of all manufacturers' inventories. Given their political clout, businesses will continue. to do very nicely. They'd simply lose the power to wheel and deal for custom-made subsidies and concessions.

Search America and you'll find precious few economists who believe a ban on customized tax breaks or subsidies would inhibit economic growth. The critical factors for healthy local economies, says William Schweke of the Corporation for Enterprise Development, are work force, technology and infrastructure.

The conservative economists assembled by the Mackinac Center say about the same -- that we should abandon targeted business assistance such as direct grants and tax abatements in favor of a ''fair field with no favors.'' What's more vital, they say, are overall state budget restraint, high-quality physical infrastructure, access to transportation, a superior education system and market-based competition and deregulation.

So if ''everyone'' agrees, why can't we move?

First, the politicians find themselves under intense pressure to cut ribbons, deliver jobs, to ''do something'' to protect constituents from the perils of the new global economy.

Second, even politicians, such as Illinois' Gov. Jim Edgar, who favor an industrial peace pact among the states, find themselves under heavy pressure to subsidize as long as competitor states keep up the practice.

Only a handful of politicians -- State Sen. Charles Horn, an Ohio Republican, is one of them -- have the courage and vision to say their states would benefit from unilateral disarmament, rejecting targeted subsidies to focus on the basics of sound development.

The near impossibility of state-by-state reform is why the proponents of federal intervention have the strongest case.

Neal R. Peirce writes a column on state and urban affairs.

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