Race to the Bottom!

Competition among states and cities to lure businesses in hopes of creating jobs is not new, but it has become more fierce in recent years. An investigation by The Times found that state and local governments are giving out $80 billion a year in tax breaks and other subsidies in a foolhardy, shortsighted race to attract companies. That money could go a long way to improving education, transportation and other public services that would have a far better shot at promoting real economic growth.

Instead, with these giveaways, politicians and officials are trying to pick winners and losers, almost exclusively to the benefit of big corporations (aided by highly paid lobbyists) at the expense of small businesses. Though they promise that the subsidies are smart investments, far too often the jobs either don’t materialize or are short-lived, leaving the communities no better off.

The three-part series by Louise Story described how in places like Texas and Ohio, state and local governments have lavished millions of dollars in tax breaks on corporate giants like Samsung and the Big Three automakers — even as they faced budget deficits and were forced to cut spending on critical services. The tax revenues forgone in this giveaway frenzy should concern Congress deeply. After all, federal funds account for one-fifth of state and local budgets.

In one particularly egregious example in Pontiac, Mich., the State of Michigan gave $14 million in tax credits and a state pension fund guaranteed $18 million in bonds to a movie studio that created just 12 permanent jobs. In Texas, Amazon.com, the online retailer, received tax abatements, sales tax exemptions and other benefits totaling $277 million to open a warehouse that promises to employ 2,500 people. Those benefits were granted after the retailer closed another warehouse because of a dispute with the government involving sales taxes.

Many governments don’t know the full value of the subsidies they hand out in the form of tax refunds, rebates, loans, grants and more. And they don’t know if the jobs created would have been created anyway. The fact is, numerous studies show that such incentives result in only a small increase in jobs and that any gains usually come at the expense of other cities and states.

Local governments would be much better off investing tax dollars in education and public works that would deliver long-term benefits to both businesses and workers. California, for instance, is among the least generous of the larger states in doling out tax breaks. It gave out just $112 per capita compared with $759 in Texas, $672 in Michigan, and $210 in New York. Its experience leaves no doubt that investments made in public institutions like the University of California system can remain critically important to economic growth decades later.

The senseless race to give away billions in subsidies is, of course, hard to stop when elected leaders think a pledge of potential jobs might help in their next election. But even when attracting businesses is a legitimate goal, it has to be done in ways that are fair and transparent.

The trouble with targeted incentives is that they are little more than transfers of wealth to a handful of powerful corporations from all other taxpayers, including other businesses. If the problem is excessive tax burdens on businesses in general, then the solution is broad tax reform that also benefits small business owners, who are more likely to stick around if the regional economy weakens and who are unlikely to hopscotch around the country in search of a bigger tax break.