Editore"s Note
Tilting at Windmills

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January 4, 2005
By: Paul Glastris

Tax Attacks III... A while back I suggested that if Democrats are interested in playing a little offense, they could do worse than champion the cause of eliminating the ability of footloose corporations to extract tax concessions out of job-hungry state and local governments.

These are some of the least-productive of all corporate giveaways. They add virtually no jobs to the nation as a whole, yet happen routinely because city A knows that if it doesn't offer up the tax breaks, the corporation in question will send--or at least threaten to send--its jobs to city B. Obviously, the extortion could end tomorrow if every state or local government agreed not to play the game. Then they could compete solely on criteria that really matter: availability of land, skilled employees, reliable public services etc.

The nation's governors have on occasion talked about creating a pact to stop the bidding war, but it's never quite happened. What's needed is federal action--a statute that would block these unproductive giveaways. Such a statute ought, of course, to come from Congress; Democrats and enlightened Republicans should offer up one. But meanwhile, as I noted before, the Sixth Circuit Court of Appeals in Cincinnati has taken the initiative, with a ruling last fall that in essence defines the grossest of these giveaways as a violation of the Commerce Clause.

A number of readers posted quite impressive comments questioning both the legal and political merits of this strategy. Since then, one of the attorneys who made the winning argument to the court, Peter D. Enrich of Northeastern University School of Law, sent me an email defending his views. I post that email here with his kind permission.

First, as for the merits of the Commerce Clause claim: Of course, we'll
have to see what ultimately happens in the 6th Circuit and perhaps in the
Supreme Court, but the decision rests on a very strong and univocal base of
case law and scholarship, all of which points to the conclusion that a very
wide array of the most common state/local tax incentives for businesses are
unconstitutional. If it would be helpful, I'm happy to give you references
to both case law and law review articles. I anticipate that, in the next
few months, there are likely to be several other cases presenting the same
arguments in a number of other states.

Second, for those who argue that these incentives are essential to provide
jobs, it's important to note the broad body of econometric research which
debunks the notion that state/local taxes or tax incentives are a
significant factor in business location decisions. The simple fact is that
state/local taxes represent, on average, only about 1 percent of a
business's costs; they're far too small a factor to play a real role in
rational decisionmaking. Probably the best recent survey of the economic
literature is Robert Lynch, Rethinking Growth Strategies (Economic Policy
Institute 2004), although similar results are reached by a broad array of
others (referenced in Lynch's book) with less "political" connections. The
only demonstrable effect of the incentive competition is the dramatic
reduction in the share of the costs of state and local government that are
borne by businesses, not any increase in -- or shift of -- levels of
investment or employment.

The political challenge is that it's very hard for any state or local
official to urge his jurisdiction to be the first one to "unilaterally
disarm." That's where the Commerce Clause argument becomes useful.
However, the courts can't solve this alone. In fact there's already
legislation pending before Congress that would undo the decision. So, what
we need now is political support for getting the states out of the "race to
the bottom" business, and for refocusing their energies on the positive
functions (schools, roads, amenities, etc.) that can truly improve business
climates...

[T]hanks for bringing the topic to another audience.

Prof. Peter D. Enrich
Northeastern Univ. School of Law

Paul Glastris 9:25 AM Permalink | Trackbacks

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