With the economy slumping and unemployment approaching 10%, states are kicking corporate tax incentives into overdrive. In the past year they've doled out a record $50 billion to spur job growth. Cash-strapped locales are depending indirectly on federal aid to fund the tax-break bonanza.
But economists are beginning to wonder whether such initiatives create or save jobs at all. Companies taking advantage of lucrative tax incentives are jumping from state to state—and bringing their jobs with them. Sure, some states will see job gains, but they may be only temporary. As a result, the states' efforts likely won't improve the national jobs picture. The tax-break boom "undermines the economic union, and it misallocates resources," says Arthur J. Rolnick, senior vice-president and research director for the Federal Reserve Bank of Minneapolis. "It amounts to economic warfare among states." ...
[S]tates often use tax breaks to poach jobs from each other. In March, Pepsi Bottling Group (PBG) began threatening to move its headquarters from Somers, N.Y., if local lawmakers didn't pass favorable tax and other policies. Now both New Jersey and Connecticut are using a slew of tax incentives to lure Pepsi Bottling to their states.
Such warring is creating a conundrum for the Obama Administration. The states are an integral part of the U.S. recovery and job-creation plan. Some economists say the only remedy is a congressionally mandated cease-fire; they're suggesting the U.S. withhold federal funds unless the states stop using tax incentives to grab jobs from other states. Says Rolnick of the Minneapolis Fed: "It's time for Congress to act."