U.S. LAW & GLOBAL TRADE RELATIONS.

      The recent news that Boeing in the state of Washington and ESPN in Connecticut have received or about to receive millions more in state tax breaks have revived the national debate over the merit of state economic incentives to attract and to retain corporate businesses.

     Previously I wrote two blogs on this general subject.  I argued that both tax and economic incentives for economic development and job creation are necessary. They need to be done carefully and are critical to economic competitiveness. They do not amount to corporate welfare or a “beggar-thy-neighbor policy.”  Better metrics and their measurement mean better policies and better implementation. It is important  to distinguish between tax incentives and other economic incentives as we’ll as between foreign corporate investments and domestic relocations. Focusing on attracting foreign direct investment is particularly important in this era of globalization. All competition is global today.

     To me this debate over incentives is one of the most important issues confronting states today. This debate is not just one of theory but of very real consequences. State and corporate officials really need to create a better narrative to garner greater popular support. This is essential. Better public diplomacy is necessary for better public policies.

      Since this is a continuing and very divisive debate the following are some of my earlier comments.

…. “Boeing and State Tax Breaks” Wall Street Journal  (12.10.13)

…. “ESPN and State Incentives.” New York Times (12.27.13)

          [From December 2, 2012] …………..

The New York Times recently published a series of front-page articles on state and local incentives and economic development. This series was the culmination of  a 10-month investigation into economic incentives awarded by hundreds of cities, counties, and states.

Perhaps the most invaluable contribution of the series is its extensive interactive databases about the companies, states, and sectors involved, including per capita expenditures, percentage of state budgets going to incentives, and an extensive listing of the types of incentives (tax refunds, loan guarantees, tax credits, and more).

……“Companies Seek Tax Deals.” New York Times (December 2, 2012).

The New York Times investigated several recent high-profile cases from Michigan to Texas. It concluded  that there is a significant  degree of cronyism involved in awarding these incentives, and they  place a large drain on state and local budgets, often without much to show for themselves.

The articles highlight the lack of a national debate on this widely used approach to economic development during the ongoing economic crisis.

While focusing on the political and business aspects of incentives and not as much on economic theory or historical cases, this series emphasizes one  topic that has been argued  over through the years: Whether these incentives represent  “beggar-thy-neighbor” policies, corporate welfare and if  they come at the expense of other priorities, including improving workforce training and developing better employment conditions, such as wages and benefits.

The New York Times series  contend that long-term benefits may be at least as likely to come from investing in public universities and infrastructure projects as from supporting corporate relocations. That large corporations have the ability to lobby for declining tax dollars and then follow the best incentive offers where they may appear.

There is a broad range of state and local incentives, including among others: corporate income tax credit, state tax refunds, various tax exemptions (for example, local personal property and property taxes), cash grants, loans and loan guarantees.

To me state incentives need to be carefully assessed in terms on competing economic interests,  expected outcomes, and measurable metrics.

One needs to delineate between state support of domestic corporate relocations and foreign ones. One needs also to consider state support of export promotion, especially of small and mid-size firms, as distinct from corporate relocation.

Unfortunately, in 2006, the Supreme Court declined an opportunity to rule on the use of state incentives for economic development under the interstate and foreign commerce clause. This, however, really is a major issue of federalism that needs to be decided by the courts.

The extensive interactive data sets  in the New York Times series can let policy makers assess and compare the impact of economic and fiscal incentives on state budgets, taxes, and corporate policies, including relocation and expansion. For example, they make clear the relation of incentives to actual job creation.

It should be emphasized that this debate is particularly important when comparing the value of incentives for corporate relocation within the United States against that of recruiting new foreign direct investment into the United States (“Greenfield investments”).

Is there a more valid reason to offer economic incentives to foreign companies not located here than to firms already located in the United States? Is it preferable to fund export promotion rather than domestic corporate relocation and thus avoid the beggar-thy-neighbor dilemma? 

By the way,  the World Trade Organization (WTO) recently ruled that state and local incentives given to Boeing in the state of Washington are illegal subsidies that violate U.S. global trade obligations.

I look forward to more rigorous assessments of state incentives and economic development in our rapidly globalizing and hyper-competitive world. Taxpayers and society deserve closer government and public scrutiny of these state programs in order to support more sustainable economic development.

From my personal observation, as a board member of the Virginia Economic Development partnership, the range of incentives available in Virginia, at both the state and local levels, are an essential element of economic development. This along with a favorable regulatory business environment constantly drives Virginia to be ranked as one of the most business friendly states in the United States. One that leads in job creation.

Virginia state incentives are definitely free of the political cronyism that The New York Times reported on in Texas.  Virginia State Economic Incentives (Nov. 2012)

Proper procedures, continuing oversight, specific performance metrics, and constant evaluation are essential to successful state actions in awarding and monitoring  a broad range of state incentives aimed at economic development and job creation.

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  [From Jan. 9, 2012]

Weak economic performance over the last decade has prompted states to become more aggressive in their economic development efforts to attract foreign firms, investment, and jobs.

Critics argue that state incentives to attract foreign firms amount to corporate welfare.

These critics point to literature denying the benefits of incentives for attracting any firm, domestic or international. They argue that such efforts lack state accountability of public funds. They draw a parallel to weak corporate governance provided by managers and boards of directors. These objections miss the point.

Let’s start with the last point concerning accountability.

The well-known corporate theory of agency declares that managers and corporate officers are agents of the corporation and working on behalf of widely dispersed shareholders. They along with board members have a fiduciary duty to the corporation. The “Business Judgment Rule” imposes a  strict standard of fiduciary responsibility on boards members. However, managers often do what they want in their own interest without meaningful oversight or restriction.

As we all know when equity ownership is so dispersed corporate executives and bankers with the cooperation of the boards become highly overpaid. Just look at the last ten years, jobs were lost by the millions and income inequality grew dramatically.

The issue of corporate responsibility is different from state accountability.

State officials are not overpaid and are out of office after periodic elections. State officials are directly responsible to the voters. To the contrary, corporate directors are often personally selected by the CEO and senior corporate management with only pro forma board elections.

Voters provide local control over state officials. Board members overseeing state incentives are often subject to confirmation by state legislatures. Elected state officials do not become personally wealthy at the expense of state citizens.

States have an obligation to provide education and training to its residents. You simply cannot say that when states work in partnership with a firm, often through a community college, this is not a public good. This model is followed by other countries, such as Germany, with great success. Investing in the skills of labor for the long-term is critical. Correcting the mismatch between new job openings and the workforce is essential.

The recent report Good Jobs First (2011) criticizes state incentives as not providing sufficient metrics in their incentives. This is certainly not true for the state that I’m most familiar with, Virginia. This report complains that specific wage levels and benefits should be required for state incentives. But the imposition of wage and benefit levels  in this case would amount to excessive government intrusion into the private sector in an uncertain time.

There is a difference when a state attracts a corporation or investment from another state or an international corporation from another country.

Leaving aside the domestic corporate relocation, which often make firms more competitive when locating to a more business-friendly state, attracting foreign firms and investment does not raise in any way the issue of “beggar-thy-neighbor” or race to the bottom. A policy of attracting foreign investment and foreign corporations for economic development is a no-brainer. This is a legitimate function of state government.

States need to become more aggressive globally to survive newer trends in globalization. Providing state incentives to attract foreign firms, trade, and investment is crucial to the revival of the U.S. economy and the creation of new jobs. We all have a stake in it.