Ending the Tax Incentive Game

Posted on May 25, 2005
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A recent court ruling could make direct tax incentives illegal. The time-honored tradition of brokering specialized tax deals to lure companies to locate or expand in one state over another could finally be coming to an end. "The economic war among the states," as Minneapolis Fed research director Art Rolnick describes it, could be over. 

The case in question was in Ohio, where a federal appeals court struck down a $281 million deal the state gave to DaimlerChrysler. Though it's expected to be appealed to the U.S. Supreme Court, there are pending lawsuits on the horizon in at least three other states.

While some groups oppose the decision on the laudable grounds of maintaining state sovereignty, the economic distorting effect of targeted incentives may call for a decision like this, which was based on the U.S. Constitution's commerce clause. As Rolnick puts it, "From a national perspective, there are no jobs being gained here. Studies show that most of the companies locate where they were going to go anyway. But if you're the CEO of Boeing, you're going to play the game...If you want to promote better economics, lower taxes for all businesses and build better roads."

That's certainly a message worth keeping in mind as Valley jurisdictions continue to base economic development on handouts for the few over a stable buiness environment for everyone.

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