WITH more than a half-billion dollars grossed worldwide, “The Amazing Spider-Man 2” is one of the summer’s biggest blockbusters. It’s also the largest film production ever made in New York, and as a result, the largest beneficiary of its tax breaks for movie makers. Every year, New York gives roughly $420 million in tax breaks to the film industry alone. Louisiana comes second at $236 million.
Yet these colossal corporate benefits pale in comparison to other benefits that state and local governments grant to big businesses. Boeing recently announced that it will build the wings for its 777X jet in Washington state after it offered the aircraft maker the largest benefits package in U.S. history, worth $8.7 billion. Overall, state governments annually dole out tens of billions of dollars of tax breaks, subsidies and other benefits to attract companies, often engaging in bidding wars with other states. This game doesn’t just hurt the losing states; the winners suffer, too.
Many people have an aversion to governments picking winners and losers through direct subsidies. Taxing the little guy to give money to big corporations doesn’t strike most of us as fair. Nevertheless, few oppose targeted tax breaks granted in the name of “economic development” and “revitalization.”
But, in fact, there is no fundamental difference between government subsidies and tax expenditures. Both put other businesses at a competitive disadvantage and misallocate resources by artificially making some activities more profitable. And they both require additional tax revenue from elsewhere.
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Many jobs the tax breaks allegedly create would have appeared anyway because companies don’t primarily choose their location based on taxes. But once they select a locality, they have the incentive to pretend that they are considering the move and then bargain with governments for the biggest tax breaks.
Companies play the same card even if they aren’t actually thinking about moving. When the New York Stock Exchange claimed that it was considering relocation to New Jersey, the state government enticed it to stay. In 1998, it offered the NYSE benefits worth more than $1 billion, including a new trading floor. The incentive worked, and the company stayed.
Targeted benefits encourage companies to game the system. In 1993, IBM caused a rapid increase in local unemployment by laying off 7,000 people in upstate New York. Seven years later, the government declared IBM’s location an enterprise zone, a label bestowed upon high-unemployment areas in need of revitalization. Combined with additional subsidies, this earned IBM $659 million in benefits. By arguing that they are important for the state economy, large companies in particular can receive benefits to invest more or expand their workforces.
Targeted benefits also encourage excess lobbying and risk corruption. When defense contractor Raytheon threatened to leave Massachusetts in 1995, the state didn’t respond with offers of incentives, so Raytheon paid a lobbying team to organize a public-relations campaign. One message was that the state’s “defense initiative” would save 117,000 jobs. The governor soon offered Raytheon $20 million in tax cuts, labeling the policy a “jobs package.”
When companies know they can obtain special benefits, they have the incentive to present the government and the public with exaggerated and incorrect information about the benefits of targeted tax breaks.
Targeted benefits create unhealthy relationships between businesses and local governments. In this environment, business success increasingly depends on a company’s connections and ability to obtain tax breaks rather than provide customers with the best products and services. When companies must focus on what they can take, rather than what they can create, the effects are damaging and long-lasting for the local economy.
State and local governments should realize that they do their own economies a disfavor by doling out special benefits to companies. If they want to attract more companies, they should lower taxes across the board and promote a business climate that attracts the most competitive companies — not the companies with the best political skills and connections.
Christopher Coyne, professor of economics at George Mason University, and Lotta Moberg, doctoral candidate in economics at George Mason University, co-authored the working paper “The Political Economy of State-Provided Targeted Benefits.”