Nevada’s decision to give Tesla $1.3 billion in tax cuts to locate it’s new battery plant there has generated a fair amount of complaints about incentives like this where states or municipalities give big companies tax cuts to locate factories or warehouses in them. On a per job created basis the cost is very high; the money doesn’t lead to any net job creation but rather job reallocation; the amount of jobs created is usually exaggerated. Richard Florida has a piece today laying out these arguments. But I think this is a misdiagnosis of the issue. It’s not that the states and local areas that offer these incentives aren’t gaining overall, it’s that the country is losing out.
While Florida and others make the case that the costs per job are high I think in the end these incentives often do make sense for the states and localities involved. It doesn’t make sense to examine better uses for the tax cuts, because without the companies locating there you wouldn’t have new tax money to spend. So the argument “we’d be better off spending $100 million on our schools” isn’t really relevant, true as it may be that the returns to $100 million in education may be higher.
And I also remain unconvinced that these companies aren’t actually being lured by these incentives. Florida argues that “incentives play little if any role in companies’ location decisions, which are based on more fundamental factors like labor costs, the quality of the workforce, proximity to markets and access to suppliers”. If this was true, then you wouldn’t see so much uncertainty from commentators when the selection process is happening. Did anyone step forth when Tesla was shopping for incentives and say “the factory will obviously be located in Nevada regardless of incentives because of cost advantages”. What’s more, the economic considerations for a lot of these businesses are simply decent highway access and cheap land and labor. This is hardly something in scarce supply, and communities with these conditions are right not be confident that they have something special and are in a strong bargaining position.
No, I think the problem with these incentives is not that they are a rip-off for the localities that use them, but that they are a good deal for them. The problem is that they are a zero sum for the U.S. overall. Jobs gained somewhere are lost somewhere else, and there isn’t any efficiency gained in the process. States and localities aren’t competing by offering better governance overall, which would create a net economic benefit, but by cutting one-off special deals. Thus the only thing that is being generated is an appetite and capability for cronyism, and lower costs for large businesses relative to small ones.
It’s important to recognize that these deals make narrow economic sense because it has drastically different policy implications. If these incentives were bad deals, the solution would be to better inform states and localities. But because they represent a prisoners dilemma where the economically inefficient decision is locally optimal, it means something more is required. This might mean regional pacts, of federal action, or something else. I don’t have a good answer. But it’s important to recognize that the battle won’t be won with better information for decision makers.
Ribbon cutting. Check out the story at beaufort.thedigitel.com/arts-culture/photos-beaufort-city… (Photo credit: Wikipedia)