Resolving the war between the states

Growing concern over public subsidies for corporations has led government officials to seek an end to the battle over jobs.

October 17, 1999|By Jay Hancock

THE DEVELOPMENTS are small but possibly significant.

Nine state legislatures have asked Congress to end the fierce interstate competition to lure businesses with tax breaks, grants and sweetheart loans. A bill in Congress would tax one-company subsidies out of existence.

Governors continue to talk about job-war peace treaties. Some analysts think state business giveaways will wilt under global disapproval of government-subsidized exports.

As concern grows over preferential treatment for companies that demand state subsidies and threaten to go elsewhere without them, so does talk of a solution.

As The Sun reported last week in a series of articles, states spend $3 billion a year in narrowly aimed business tax breaks, grants and other economic development subsidies. More than two-thirds of the states increased these subsidies in the past two years.

Few economists or elected officials in either political party have good things to say about these giveaways, which amount to negotiable taxes and spawn what Maryland economic development secretary Richard C. "Mike" Lewin called "extortionate behavior" by corporations.

But governors feel compelled to offer them or watch jobs fade across the border. Abandoning incentives would hinder Maryland in the competition for employers, economic developers say. Calling bluffs of corporations threatening to go elsewhere could backfire.

"I can't unilaterally disarm," said Lewin. "That wouldn't be in Maryland's interest."

For their part, corporations feel obligated to take incentives to discharge their duty to shareholders.

The Sun interviewed several policy experts about possible remedies to what some call "the economic civil war" -- or at least improvements to what many believe is an intolerable situation.

One hope is a proposed punitive tax on economic development incentives -- not to raise federal revenue but to deter companies from accepting "corporate welfare" in the first place.

"This business of dipping into state treasuries to subsidize businesses is just not good use of taxpayers' money," said David Minge, a Democratic congressman from Minnesota who has sponsored a tax on incentives. "State leaders, and even economic development officials, have been very frustrated by this competition."

Gov. Parris N. Glendening supports Minge's bill, which would invoke the commerce clause of the Constitution enabling Congress to regulate interstate economics.

"These cities or these states [that use incentives] are interfering with interstate commerce," said Arthur J. Rolnick, an economist with the Minneapolis Federal Reserve and leading incentives critic. "What Congress should do is prohibit it, just like they prohibit interstate trade wars."

Minge and his supporters portray his bill as "a tax we expect never to collect." Faced with the confiscation of giveaways, companies would simply avoid the trouble of applying for incentives in the first place, Minge said.

He is optimistic about the complicated job of defining an unfair incentive. The bill would permit broadly available corporate benefits such as road improvements, general tax cuts and training programs. Much of the fine-tuning would be done by the Internal Revenue Service, under broad guidelines of an anti-incentive law.

Large in the law's sights would be the kind of one-company grants and tax cuts recently given in Maryland to Marriott International Inc., Bethlehem Steel Corp., Northrop Grumman Corp. and other companies.

His bill, the subject of a hearing before the House Budget Committee this year and recently referred to the Ways and Means Committee, gets mixed reviews.

"I'm concerned that Congress has no more expertise in this than state legislators or local council people," said Lawrence Reed, president of the Mackinac Center for Public Policy, a pro-free markets Michigan think tank that has been critical of incentives.

Hobbling Minge's bill on Capitol Hill is its "tax increase" label. Republicans who have signed "no new tax" pledges are loath to leave themselves open to accusations of flip-flops, he said.

"I think he will have a hard time getting it passed," said Jeff Finkle, president for the Council for Urban Economic Development in Washington. "There are a number of states that don't want to have the federal government legislating whether they can use incentives or not."

Cease-fire attempts

Some states have tried to negotiate cease-fires.

A few years ago, Maryland's legislature asked Glendening to contact states from North Carolina to Pennsylvania, asking them to agree to "a repeal of any law in each state that provides a tax subsidy, including any tax credit, deduction, exemption or other modification, that is intended to create new jobs or entice new jobs to the state."

The goal: a bloc of enlightened, collegial states competing on the merits of work forces, life quality and broad, fair tax policies -- not special giveaways.

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