The Problem:

A chief problem for corporate subsidy reform efforts is that they’re very good for individual politicians, as those who engage in more dealmaking receive more votes in subsequent elections.[1] For this reason, governors’ use of incentives has been found to increase during years in which they are up for reelection.[2] Corporations know this, and they play different jurisdictions off against each other, such as when Kansas and Oklahoma both passed large incentive packages for Panasonic, fearing that their loss would be the other state’s economic and political gain.

It can therefore be challenging for a single state or municipality to unilaterally abolish these programs, particularly if there’s a perceived political price paid by incumbents.

The Policy:

States can form an interstate compact to stop corporate subsidies, which removes the potential political penalty for any one state ending its programs unilaterally. Under such an arrangement, states sign a mutual cease-fire, agreeing not to use incentives to poach businesses from any other state that joins the compact. Thus, no single elected leader has to sit idly by while other states engage in dealmaking to lure business away.

Kansas and Missouri implemented a version of this in 2019 to prevent corporations from moving across the greater Kansas City metro area — which straddles both states — in order to claim tax incentives.[3] State-level compacts are very common. States belong to an average of 25 apiece, and they cover a range of topics, from water and flood management to crime control to common licensing regimes for lawyers and doctors.[4] State legislators can choose to do this nationally, or make smaller regional pacts.

Model bill: HB0145, Illinois, 2021

Notes:

[1] Jensen, Nathan M., Edmund Malesky, Mariana Medina, and Ugur Ozdemir, “Pass the Bucks: Credit, Blame, and the Global Competition for Investment,” International Studies Quarterly (2013) 1–15, https://sites.duke.edu/malesky/files/2014/07/Pass-the-Bucks.pdf.

[2] Slattery and Zidar, “Evaluating State and Local Business Tax Incentives.”

[3] Garofalo, Pat, “What’s the Matter With Kansas City?,” Boondoggle, Aug. 15, 2019, https://boondoggle.substack.com/p/whats-the-matter-with-kansas-city.

[4] “10 Frequently Asked Questions,” National Center for Interstate Compacts, https://www.csg.org/knowledgecenter/docs/ncic/CompactFAQ.pdf.