In what should be a repudiation of each Gubernatorial administration for twenty years, economists are publically calling into question the effectiveness of the primary industrial development strategy by Alabama Republicans and Democrats.  Their knee-jerk “jobs solution” is not getting much support from professional economists.

But many experts doubt whether tax cuts create jobs, particularly in a state that, by most measures, has the lowest tax burden in the nation.

“Taxes tend to be a relatively small component of the cost of doing business,” said David Brunori, a vice president at Tax Analysts, a Virginia-based nonprofit that provides tax news and analysis. “The real cost of doing business tends to be raw materials and labor. And that is really what drives business investment, assuming you have a market.” . . .

It’s not clear whether slashing taxes leads to paychecks. A 2010 paper prepared by the Federal Reserve Bank of San Francisco, which studied state tax credits for investments in equipment and research and development, found a one-percent cut to corporate taxes would only increase Alabama’s economic output by a half-percentage point. A one-percent increase in investment tax credits for equipment would boost it three percent.

While GOP Bentley/Hubbard/Marsh/Canfield continue to preach the gospel of more-and-more tax-incentive packages, Democrats are equally to blame. As I wrote months ago, “These type of policies only create a race to the bottom. Another state will always be able to play the system and out-bid us through greater tax breaks, more immunity, less restrictions, more grants, and more corporate welfare. At what point do our policy-makers look out for the common good? Can they not see that we are being played.  At some point, we must stop begging to be abused, bullied, and exploited.”

All partisans are guilty of playing this game:

Bentley isn’t the first governor to tout tax packages for development; Gov. Bob Riley touted similar legislation during his eight years in office and supported Bentley’s 2010 bill. Govs. Jim Folsom Jr., Fob James and Don Siegelman all sold tax-break laden packages for big companies as job creators.

And Alabama is not alone in offering credits: Business Week reported in July 2009 that states gave out $50 billion in tax incentives to companies during the prior year in an attempt to fight the recession.

“I think what is driving that is the politics and the need to do something, and the need to look like you’re doing something,” Brunori said.

For all that, both Brunori and Burtless weren’t certain how much lower Alabama taxes could go. Neither bill establishes a limit on the state revenue that can be reduced under the credits, and no one is certain how much state revenue would be lost from credit claims.

I’m just kind of surprised Alabama has the tax resources to give up so many tax resources this way,” Burtless said. “That’s kind of an expensive program to do.”

“Doing something” sometimes is more damaging than not.  But our politicians cannot stop being extorted engaging in multi-state bidding wars .

Alabama Development Office director Greg Canfield argues that tax credits are a necessity in Alabama’s cutthroat competition with other states over business and jobs.

Tax credits are not the only tool employed by the state. Bentley last spring recommended a nearly $5 million, 20 percent increase in money for workforce development through the Industrial Training Institute. The Legislature ultimately approved a raise of $2.5 million.

When Alabama is in competition for new investment in the state, we are in competition with other states,” he said. “Other states have a toolbox of taxes they use every day against us.”

Who’s throat is being cut? The working people and small businesses of Alabama. These multi-state corporations lodged state governments against each other so that small-businesses and working families get stuck with the entire tax obligation to fund all the services of the State.  When the publicly financed “honeymoon” is over, there’s nothing to keep the business from flirting with other potential suitors and starting the cycle all over again. Listen to some of these accounts from these bidding wars:

  • PENNSYLVANIA: “The earliest example of this type of economic incentive was the Commonwealth of Pennsylvania’s offer of $86 million in incentives to build a Volkswagon factory in 1976. The factory was supposed to produce about 20,000 new jobs, but actually employed only 6,000 people before it shut down 10 years later.”
  • KENTUCKY: “The race to grab federal funding for an advanced battery manufacturing plant may get more expensive for Kentucky taxpayers. State officials are trying to find additional incentives to bolster their chances against Michigan in a cut-throat competition for $2 billion in federal stimulus dollars to help fund proposed lithium-ion battery plants. Kentucky pledged on Monday to invest about $200 million in a $600 million advanced car battery plant proposed for Hardin County by a non-profit consortium of more than 50 companies.”
  • GEORGIA: “State government incentives offered to lure technology company NCR to Georgia are worth at least $96 million, according to an Atlanta Journal-Constitution analysis. That is $36 million more than the state estimated when the deal was announced last week. The $96 million tally does not include another part of the incentive package, a state grant.”

Why must we play this game. Can we not call a cease-fire? After all, do these incentive packages even work?

The Corporation for Economic Development found:

most economists and policy analysts agree that incentives are not good development policy. In using them to attract businesses, cities and states: (1) waste scarce public dollars without creating net new jobs in the vast majority of cases; (2) subsidize the shareholders of these companies for the economic actions they would have taken anyway; (3) foster unfair competition by helping some firms and industries and not others; and (4) divert the attention of policymakers from other issues that could lead to additional job creation and a better business climate.

As Federal Reserve economist Arthur Rolnick noted:

Unfettered competition among private businesses has generally proven to be a very successful economic system … And experience has shown that Smith was right. Those countries that have relied on a market-oriented economy have outperformed (based on virtually all measures of success) those countries that have relied on a central planning strategy.

But what is true of individuals acting in their own interest is not necessarily true of state governments acting on behalf of their local citizens. Competition among governments based on their general tax-and-spend policies leads to a better outcome for the overall economy. However, when that competition takes the form of preferential financial treatment for specific companies, the overall economy is made worse off. Such competition results in a misallocation of resources and, in particular, too few public goods.

I am not suggesting the State sit idly by. I agree with the argument by Elaine Krewer:

while I don’t mean to oversimplify the issue, I can’t help but wonder why some people who would consider it wasteful pork to spend, say, $100 million on a public works program would not bat an eye at the same amount being given to a private company in the name of job creation.

For starters, instead of giving into the extortion, a better strategy to promote economic growth may be encouraging local businesses rather than recruiting large outside firms. Alabama should employing its purchasing power to build a market for Alabama businesses (see here, here), meeting our local needs, locally (see here, here),  rebuilding wealth-producing assets in the working people (see here, here ), empowering community anchor institutions, developing local energy production, and developing resilience in our communities and food supply.

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