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The debate around corporate tax breaks usually centers on a specific giveaway. Should Virginia have given hundreds of millions of dollars to Amazon for its so-called HQ2? Does Netflix really need $24 million, plus an undisclosed amount of property tax reductions, from New Mexico? But playing whack-a-mole and attempting to stop one deal at a time isn’t the most efficient remedy for addressing the issue of states and localities dishing out tens of billions of dollars to big corporations every year.
There is a better way: an interstate compact. This would allow multiple states to join together to agree not to use tax breaks or other economic enticements to lure corporations to hop from one locale to another. The hope is to eventually eliminate corporate incentives entirely and introduce democratic input and accountability to an area of policy lacking it.
A model for this sort of compact is the one Kansas and Missouri implemented in 2019, in an effort to stop corporations from playing the two states against each other to claim incentives by moving across the greater Kansas City metro area. Since that time, deals that would have been approved with barely a thought by one of those states have been rejected, saving taxpayers money.
The interstate compact solution is attracting increasing attention. In the 2021-2022 legislative session, lawmakers in 11 states have introduced bills to form a compact to eliminate corporate tax giveaways, and a few more bills are in the works. This is up from five states in 2019. (Full disclosure: I work with a coalition of state lawmakers and policy experts and advocates that tries to get these bills written and introduced.)
A compact gives state lawmakers a way around the political problem of corporate tax incentives, which is this: No officeholder wants to look like they are doing nothing for their constituents, while those in the next state or town over are announcing deal after deal. No one savors the appearance that they’re losing jobs to the pol down the street, even if those jobs don’t actually materialize after the ink is dry and everyone has moved on to the next thing. The interstate compact aims to solve this issue by having states multi-laterally disarm, together. It is a political solution to what is, at its core, a political problem, not an economic one.
Were the compact to become law, states would initially agree not to use tax incentives or other favors to poach jobs from any other state in the compact. Non-compact states would still be fair game, and will hopefully want to join the compact later.
In addition, compact states would agree to form a board that would meet yearly to discuss changes to their agreement, as well as to implement a set of data-sharing and transparency practices such as building a database of deals and sharing incentive contract language so that corporations would be less able to play states and cities off against each other. This is important: Many corporations insist on secrecy from local lawmakers and development office officials – including having those officials sign non-disclosure agreements or demanding restrictions on what information about incentives are subject to public records requests – as part of the hardball they play with states in their effort to extract the most money they can from a community. The result is it’s often hard to discover just how valuable the arrangement turns out to be.
This may sound radical, but interstate compacts are actually extremely common in all sorts of areas. There are currently more than 200 active interstate compacts, covering everything from water and flood management to crime control to common licensing regimes for lawyers and doctors. The typical state, in fact, belongs to 25. This simply expands the concept to put an end to the dog eat dog competition between states to attract “jobs.”
The pandemic is crushing state budgets and striking a fatal blow to hundreds of thousands of small businesses, while corporate tax breaks are a sinkhole for taxpayers that disproportionately go to larger companies. But it also offers an opportunity. There’s no money to spare on ineffective prop-ups for already-large businesses when Main Streets have been obliterated and workers everywhere are hurting. Instituting an interstate compact would save tens of billions of dollars, money that could be spent on policies that actually promote job creation and economic opportunity. We need to shift the debate on economic development back to a place where the outcomes benefit everyone.
This post initially appeared in a slightly different form on the author’s Substack, Boondoggle.
Pat Garofalo is the author of The Billionaire Boondoggle: How Our Politicians Let Corporations and Bigwigs Steal Our Money and Jobs, the Boondoggle newsletter, and the director of state and local policy at the American Economic Liberties Project.