Lining the pockets of big business
IN RECENT YEARS, states have found themselves caught in an accelerating competition to offer ever-larger tax breaks to big businesses. The rationale, aggressively marketed by corporate lobbyists, is that giveaways are necessary to attract business investment and jobs to a state, and that the resulting expanded business activity will more than pay for the lost revenues from the tax cuts.
Reality, however, contradicts these claims. Several studies, including one by economist Robert Lynch in 2004 called ''Rethinking Growth Strategies: How State and Local Taxes and Service Affect Economic Development," establish that state tax incentives have, at best, a minimal impact on businesses' decisions about where to locate their facilities. State taxes are simply too small a fraction of business costs (typically 1 to 2 percent) to be a major factor in siting decisions. Moreover, since all states are offering competing incentives, the differences are usually very small.
When asked about the efficacy of business tax incentives during his confirmation hearings in 2001 to be US treasury secretary, Paul O'Neill, former chief executive officer of
The real effect of these tax breaks is a dramatic loss of state and local revenues. In 1997, the national cost of state and local incentives was estimated at $50 billion, and the numbers have grown dramatically since then. The result: heavier tax burdens on individual taxpayers and small businesses. And less money for education, infrastructure, and the other government services that the research shows are real factors affecting business decisions about where to locate.
Nonetheless, state policy makers find it hard to say no to these giveaways. As long as other states are offering them, no one is ready to unilaterally disarm. And big businesses have become adept at playing states against one another to extract generous tax breaks. The states are caught in a vicious cycle of proliferating business incentives.
The best hope for saving the states from this destructive competition lies in the courts. Tomorrow, the US Supreme Court will hear a case,
In fact, one of the primary purposes behind the Constitution was to put an end to tax wars among the states that were threatening to balkanize the national economy. Over the years, the courts have repeatedly stepped in to stop the states from using their tax systems to pursue parochial aims in ways that ended up hurting all of them. In particular, they have repeatedly forbidden a wide variety of state tax measures providing preferential tax benefits that are restricted to in-state business activity. The present array of location incentives are just the latest examples in that long history.
Meanwhile, corporate lobbyists are already laying the groundwork for federal legislation to reverse the impact of a possible Supreme Court decision invalidating location-based tax incentives. But hopefully, once the court has acted, Congress will have the wisdom to save the states from the renewal of a rivalry that only lines corporate pockets.
Peter D. Enrich, a professor at Northeastern University School of Law, is representing the plaintiffs in the Cuno case. 
