3 Ways Congress Could End the State Subsidy Wars
Don't hold your breath, though.
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State-based corporate tax incentives are nearly as old as the United States itself. The first documented one was approved in 1791, when then-U.S. Treasury Secretary Alexander Hamilton was granted a 10-year tax exemption in what is today Paterson, New Jersey, to build a manufacturing campus.
At the time, critics said that the deal was “unjust,” “arbitrary,” and “injurious … to other states.” And they were right.
In fact, Hamilton really set the tone for the coming centuries when it comes to corporate handouts: His planned manufacturing paradise never came to be, and several of his associates were convicted on corruption charges.
Since then, corporate subsidy battles between the states have ebbed and flowed, but never gone away, resulting in today’s $90-some billion spent annually on corporation-specific subsidies at the state and local level.
Though most of the time I write about how state and city leaders and community members can combat the scourge of corporate subsidies themselves, in theory, Congress could swoop in and knock the whole thing off, stopping states from engaging in this race to the bottom. Here are three ways that could be accomplished.
(There are probably others too, so send me a note or leave a comment if you have thoughts. You could also quibble with whether these are three distinct ideas or one or two that has different variations.)
1. Tax Away the Benefits: Back in 1995, Arthur Rolnick and Melvin Burstein, both then of the Federal Reserve Bank of Minneapolis, wrote a piece explaining that, in their view, the problem of state corporate subsidy spending could only be solved by Congress. (I don’t agree, but that’s a story for another day.) They proposed several ways Congress could accomplish this using the Commerce Clause, which grants the federal government the power to regulate interstate commerce. At the top of the list was taxing away all of the benefits corporate subsidies provide.
They proposed two ways this could work: First, Congress could tax the corporations 100 percent on the money they receive from state governments, effectively rendering those handouts worthless, if what the state gave them immediately had to be turned right over to the federal government.
Or Congress could deny tax-exempt status to the debt of states that use corporate subsidies, eliminating a key federal subsidy that makes it easier for states to raise money for their infrastructure spending.
2. Make Other Federal Aid Conditional on Ending Subsidies: That latter suggestion looks very similar to another way Congress could end the subsidy war between the states: By making federal funding conditional on ditching corporation-specific subsidies. Such a restriction could be added to some sort of recurring federal funding, such as the money given to states for building highways.
That, in fact, is how Congress got states to raise the legal age for drinking alcohol to 21 across the board: By threatening to take away their highways funds if they didn't.
As Michael D. Farren and John Mozena wrote in 2020, Congress could also have used emergency funding, such as that provided in response to the coronavirus pandemic, to issue the same sort of edict: No aid without ditching the harmful practices that make us all worse off.
Congress actually did include in its federal pandemic aid a restriction on using that money to reduce taxes, and the Treasury Department, in interpreting that rule, said it applied to new corporate subsidies. However, it’s unclear if anyone over at the Treasury is actually enforcing that provision, as states are still creating new subsidy programs, and don’t seem to fear any federal clawbacks of their Covid funding.
3. Swap Subsidies for More Federal Funding: If the above is more of a stick approach to cajoling the states into doing the right thing, then this one can be characterized as the carrot (though with some stick still included): Giving states funds for developing small businesses and entrepreneurship, and rewarding them with more money if they eliminate existing corporate subsidy programs.
Duke University’s Aaron K. Chatterji outlined this approach in a paper for the Hamilton Project, calling for the creation of what he dubbed the “Main Street Fund,” which would provide states with money to foster local business creation. “Each state would be allocated payments according to a formula that takes into account the state’s population, demographics, and economic activity. States would have their Main Street Fund payments reduced if they provide new incentives, and they would receive extra funds if they canceled existing incentives,” he proposed.
So Congress, while still punishing states for creating new corporate subsidies incentives, would attempt to make eliminating them more worth the states’ while.
In 2013, the former mayor of Kansas City, which has had subsidy controversy after subsidy controversy over the years, wrote that, “We need a national law that prohibits corporations from extracting bribes from state and local governments and bans governments from donating tax dollars to private entities — a sort of domestic equivalent of the Foreign Corrupt Practices Act, which prohibits American companies from bribing foreign governments.”
Indeed, one of the chief reasons that such spending continues when the weight of the academic evidence says it is worthless is that no one city or state wants to unilaterally disarm. Having Congress step in would solve that problem.
But I don’t actually see that happening, at least not anytime soon.
Why? Well, federal officeholders benefit from some of the political rewards of corporate subsidy spending in their respective states, getting to show up at ribbon-cuttings and whatnot even when they had little to do with the specifics of whatever deal they’re celebrating. There’s also the opportunity to create a feedback loop between state and federal subsidy spending, as occurred recently with the federal CHIPS Act, meant to benefit semiconductor manufacturers. Members of Congress can generate more political capital by claiming to have caused a state-federal combo deal that paid dividends for the community.
Also, just because Congress can solve a problem doesn’t mean that its members view it as theirs to solve, and they won’t see much political upside for doing so (while they would likely be dinged by corporate donors), since most of these deals and their fallout occurs at other levels of government.
That all being the case, I think it’s still worth knowing what Congress could do to end this problem, even if there’s no reason to think it will use those powers for the foreseeable future. Things change fast in politics, and maybe someday the political winds will blow in the other direction. If and when that happens, it’s good to be ready.
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— Pat Garofalo