A Modest Proposal
Would it be too much to ask Congress to ban relocation subsidies?
When a company moves its headquarters (say, Boeing from Seattle to Chicago) or relocates an existing facility from one place to another, there is clearly no benefit to the country as a whole, or to the state in the case of in-state relocations. Jobs are just shuffled around based on an auction, not created. This is the most obviously wasteful type of location subsidy there is: no net benefit, clear cost to the taxpayers.
Why Congress? The problem is that the states have found themselves unable to keep agreements with each other not to raid each other's existing facilities. Under the aegis of the Council of Great Lakes Governors, Midwest states put a no-raiding agreement into effect, but it was violated even before it came into effect. In the early 1990s, Connecticut, New York, and New Jersey made a similar agreement, and it, too, collapsed immediately. New York City has been a big target of relocation subsidies, and has resorted to over $2 billion in retention subsidies to keep firms from moving (see http://www.goodjobsny.org/deals.htm).
The record on voluntary agreements is mixed in other countries. Canada has had a "Code of Conduct on Incentives" since 1995 that bans relocation subsidies by law, but it has a weak enforcement procedure. Still, the use of such subsidies has dropped and they appear to be of smaller scale than in the 1990s. Ontario attempted to lure the headquarters of grocery chain Sobeys from Nova Scotia, leading the latter to give a Cdn$ 3.5 million retention subsidy. But this appears to be the exception rather than the rule.
Australia has an agreement among five of its six states, plus the two main territories (Northern Territory and Australian Capital Territory) to not engage in investment poaching. Like the U.S. agreements, the Interstate Investment Cooperation Agreement is completely voluntary, but it has held up successfully among its parties and has been renewed through 2011. However, Queensland refuses to sign, making the kind of argument we are used to hearing from U.S. economic development officials about how they will do everything in their power to bring jobs to Queensland. This isn't a question of ideology: all six states have had Labor Party governments for some time now, but the difference is that all the parties to the agreement accept the view that subsidizing location decisions is generally a bad policy. Imagine that! Subsidies are still used to compete for internationally mobile projects (ask New Zealand), but the states cooperate among themselves to avoid bidding wars when it is clear the project is coming to Australia.
In contrast to Canada and Australia, the U.S. has 50 states and thousands of local governments all taking part in the incentive wars. Banning relocation subsidies has the advantage of taking on a clearly indefensible practice, and could pave the way for the much larger reforms that are needed.
When a company moves its headquarters (say, Boeing from Seattle to Chicago) or relocates an existing facility from one place to another, there is clearly no benefit to the country as a whole, or to the state in the case of in-state relocations. Jobs are just shuffled around based on an auction, not created. This is the most obviously wasteful type of location subsidy there is: no net benefit, clear cost to the taxpayers.
Why Congress? The problem is that the states have found themselves unable to keep agreements with each other not to raid each other's existing facilities. Under the aegis of the Council of Great Lakes Governors, Midwest states put a no-raiding agreement into effect, but it was violated even before it came into effect. In the early 1990s, Connecticut, New York, and New Jersey made a similar agreement, and it, too, collapsed immediately. New York City has been a big target of relocation subsidies, and has resorted to over $2 billion in retention subsidies to keep firms from moving (see http://www.goodjobsny.org/deals.htm).
The record on voluntary agreements is mixed in other countries. Canada has had a "Code of Conduct on Incentives" since 1995 that bans relocation subsidies by law, but it has a weak enforcement procedure. Still, the use of such subsidies has dropped and they appear to be of smaller scale than in the 1990s. Ontario attempted to lure the headquarters of grocery chain Sobeys from Nova Scotia, leading the latter to give a Cdn$ 3.5 million retention subsidy. But this appears to be the exception rather than the rule.
Australia has an agreement among five of its six states, plus the two main territories (Northern Territory and Australian Capital Territory) to not engage in investment poaching. Like the U.S. agreements, the Interstate Investment Cooperation Agreement is completely voluntary, but it has held up successfully among its parties and has been renewed through 2011. However, Queensland refuses to sign, making the kind of argument we are used to hearing from U.S. economic development officials about how they will do everything in their power to bring jobs to Queensland. This isn't a question of ideology: all six states have had Labor Party governments for some time now, but the difference is that all the parties to the agreement accept the view that subsidizing location decisions is generally a bad policy. Imagine that! Subsidies are still used to compete for internationally mobile projects (ask New Zealand), but the states cooperate among themselves to avoid bidding wars when it is clear the project is coming to Australia.
In contrast to Canada and Australia, the U.S. has 50 states and thousands of local governments all taking part in the incentive wars. Banning relocation subsidies has the advantage of taking on a clearly indefensible practice, and could pave the way for the much larger reforms that are needed.
