Pete Langr: Tax incentives an unproductive arms race
Ohio was offering "dump-truck loads" of money to attract a certain wind turbine manufacturer, State Rep. Roger Reinert said earlier this year. Minnesota's offerings were more modest, just $12.7 million in JOBZ tax breaks, and maybe another $20 mi...
Ohio was offering "dump-truck loads" of money to attract a certain wind turbine manufacturer, State Rep. Roger Reinert said earlier this year. Minnesota's offerings were more modest, just $12.7 million in JOBZ tax breaks, and maybe another $20 million if certain criteria were met by the company.
It was feared that Ohio's "dump trucks" would trump Minnesota's tax breaks, but apparently that won't be the case. We've been informed by Rep.
Tom Bakk that the company, Fuhrländer, recently announced plans to build near Butte, Mont., with a couple million dollars in incentives.
I wish we could go back to the old-fashioned way of attracting business. Years ago we had a feud between Minnesota Gov. Rudy Perpich and his counterpart in South Dakota. Perpich claimed that South Dakota was "50th in everything," and that "Minnesota has a quality of life that's one of the best," while South Dakota's Bill Janklow claimed that Minnesota had "the highest corporate tax rate in the nation."
There it was, the marketplace at work: Choose South Dakota and keep more money, or choose Minnesota and get quality of life.
Now, instead of a competition based on tax rates and quality of life, there's one tax rate for some businesses, and another for other businesses -- based mainly on their political clout and lack of shame.
The sad story of Cabela's is a great example.
Cabela's has become the master at receiving tax breaks to build its stores. Two of its stores have garnered benefits worth $40 million and $61 million, at a minimum. In some cases, the subsidies going to individual Cabela's stores appear to represent their entire profit for decades.
Supporters of such subsidies argue that when a new business comes to town, even though subsidized, the new workers spend their earnings and pay their taxes, and everyone benefits.
In the case of a company like Cabela's, that's hard to believe. In one town, the value of Cabela's subsidies were $8,000 per resident. Retail workers like those at Cabela's, who generally earn little, are unlikely to make that up; neither are those who stop for a meal or gas along with their shopping trip.
The CEO of one Cabela's competitor, Sportsman's Warehouse, said it best: "If you take money and you give it to private enterprise of any type, then you're taking money away from school programs, police protection, fire protection, parks and so on...."
For a company like Fuhrländer, the equation is less obvious. Such a company would pay high wages and provide health insurance. The workers would pay taxes and not rely on government help. Fuhrländer, even with some subsidies, would likely benefit any community.
What Fuhrländer won't do, though, is benefit Butte as much as it would have without the subsidies. Instead, Butte will suffer from the loss of what should have been.
Every company should pay its fair share; the current system of luring companies through subsidies sets up a loss disguised as a win for whichever municipality attracts the business, and for all those who pay their taxes in full.
Instead of the old system, where one city would win and another would lose, we now have a system where one city loses, and the other doesn't win much either.
Even worse, the system perpetuates itself. Rob West, of Duluth's Area Partnership for Economic Expansion, is still bullish about attracting a turbine maker. To compete on a fair playing field, though, any sensible company would want Duluth and Minnesota to match any tax breaks Fuhrländer receives.
No longer is it enough for companies to compete on price and quality. Now they have to compete on subsidies, too.
That type of competition has forced Gander Mountain, another Cabela's competitor, to spend valuable capital on a lobbyist to fend off Cabela's attempts to gain publicly funded advantages. In one case, Gander Mountain lost a battle to stop the approval of an $18 million subsidy for a Cabela's to be located directly across the highway.
This is no way to run a competitive economy.
Yet Duluth and Minnesota are forced to offer millions in tax incentives in order to compete -- and others will need incentives of their own to compete with Duluth.
Wherever we live, we're all losers as long as this continues.
Budgeteer columnist Pete Langr writes every other week in the Budgeteer. Contact him at firstname.lastname@example.org .