OUR OPINION:
UNFAIR COMPETITION
State tax incentives that aid business at the expense of taxpayers justifiably challenged
01/31/05
Staff
In 2002, Georgia dangled $320 million in incentives before DaimlerChrysler and spent $60 million to prepare a site near Savannah before the automaker scratched plans to build a plant there, citing a weak economy. States lavish perks like that on companies regularly --- ratcheting up the spending into a sort of corporate welfare arms race --- hoping to lure jobs. Fortunately, the 6th U.S. Circuit Court of Appeals has struck a blow against corporate welfare at the expense of states' taxpayers. The court has ruled that an investment tax credit used by one state to compete for jobs against others violates the U.S. Constitution. (The use of property tax abatements, another common lure, was upheld.)

The ruling sets legal precedent only in Kentucky, Michigan, Ohio and Tennessee. However, the expectation of copycat challenges elsewhere has the big-business lobby and economic development officials looking to Congress to preserve a system that pits state against state. A better solution for taxpayers would be a national repudiation of what amounts to "rob Peter to pay Paul" economic development.

The only clear beneficiaries of the competition are the companies that squeeze tax breaks from states that are afraid not to participate in the jobs lottery.

Recently, computer-maker Dell wrung more than $242 million in tax breaks from the state of North Carolina and another $37 million from local governments there in exchange for an assembly plant and more than 1,500 jobs. The Dell case could be the next major test of state incentives. The nonprofit North Carolina Institute for Constitutional Law is weighing a court challenge.

"The point is to restore a reasonably level playing field for most states," said Robert Orr, the executive director of the institute and a former North Carolina Supreme Court justice.

That's exactly what states that participate in the jobs bidding don't want.

Rep. Ben Chandler (D-Ky.), who's expected to introduce legislation to protect state tax incentives, last month laid out the argument for protecting such breaks. The appeals court decision "will jeopardize job creation in Kentucky and drive business prospects into surrounding states or even overseas," he warned.

The fear of outsourcing is a common argument raised in support of state incentives. Yet data the Bureau of Labor Statistics began gathering this year suggest that the movement of jobs from one state to another is at least as large a problem as the loss of jobs to workers overseas.

In the first quarter, the Labor Department unit estimated almost 10,000 jobs were shuffled from one state to another against about 4,600 that were transferred outside the United States. The number of relocations --- but not the number of affected workers --- was reported for the second and third quarters. The relocations ran about half domestic, half foreign in both periods.

The Ohio case that has raised hopes for incentive opponents and fear among supporters also involved DaimlerChrysler. The company was promised tax breaks in 1998 in return for building a new assembly plant in Toledo. A federal district court rejected a challenge of the incentives.

The appeals court reversed part of the lower court's decision this fall, accepting the argument that the investment tax credit discriminated against some companies. Those already doing business in Ohio would not get the tax credit if they installed new equipment in another state, but they would if the equipment was used in Ohio.

A national resolution is needed. The best solution is for all states to use scarce resources to permanently improve their competitiveness against all comers. Spend the money on education, job training and infrastructure instead of contributing it to corporate coffers.

The Atlanta Journal - Constitution
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