AS IN EVERYTHING else, there are vogues in government policies for influencing economic behavior. At the federal level, direct spending is now "out" and indirect spending--that is, tax breaks--are now "in." At the state and local levels, however, the tax-break vogue is already waning.
State governments got into corporate tax breaks in a big way after the oil shocks of 1973-1974 pushed the economy into a slowdown from which it is still to recover. In an effort to attract and hold jobs, states stepped up sales tax exemptions and corporate tax rebates for increased investment and employment and sharply increased the use of tax-exempt bond financing for private industry construction.
The case for these tax breaks--pushed hard by interested employers and trade associations--is that the increased business activity they generate will more than offset the tax loss. In fact, as several studies have shown, special tax incentives have little influence on company decisions to locate or expand in a given area and simply provide windfalls to employers that must then be paid for by higher taxes on everyone else.
The most recent such study, by the Council of State Governments, shows that few firms making moves are even aware of special tax incentives. Of those that are aware, only 3 percent of relocating firms and 6 percent of expanding firms say that their decisions hinged on the tax breaks. Things that do affect firms' decisions include the supply of skilled labor (far and away the most frequently cited factor), adequate transportation, unionization and a host of other factors that make up an attractive business climate.
In fact, as another study suggests, industrial growth in the South may be explained far less by lower taxes than by proverbial southern hospitality. Southern states--in a way increasingly emulated in the North and Midwest--have let companies know that they care by doing such things as training workers to company specifications, speeding up zoning and other permits and seeing that roads and sewer hookups are in place on time. These things count heavily with employers because plant location decisions are typically made and carried out in the space of six or seven months. Even a short delay in opening can cost a firm far more in lost profits than any tax rebate is worth.
No state or locality should conclude from this that it doesn't matter how it runs its fiscal affairs. Tax concessions may not matter, but the general level of income and payroll taxes does. This is especially true if firms see high local taxes as an indication of poor government management and an indifference to business concerns--something that the District government should consider as it strives to diversify its employment base.
Getting out of the tax-break competition won't be easy without a concerted effort. With federal policy now tending in the opposite direction, however, state and local governments are beginning to consider whether their scarce revenues can be better spent on the direct investments in labor force and public facilities that are much stronger incentives for local business expansion.