Why Are States Broke? Lobbying Hollows out the Tax Core

Over at Naked Capitalism, a lengthy discussion about that $80 billion in state-level corporate welfare from David Segal:

Our states and localities are cannibalizing one another as they concoct targeted tax breaks which they use to lure corporations from their neighbors. Meanwhile, a bevy of middlemen wet their beaks by helping corporations pit sucker states off of one another and brokering deals to sell the tax credits that comprise much of the ensuing largess. 

...It's the most basic of game theory dilemmas, and in a less corrupt political dynamic, one that could be solved by the intervention of sensible federal government actors, or perhaps even through the initiation of an interstate compact that had states agree to stop poaching from one another. 

Segal offers up Boeing as an example of the more successful manipulators ("Washington State residents bested a couple dozen other states, offering to pay the hometown company $3 billion not to forsake them" but South Carolina eventually won when it "offered Boeing around $1 billion to open a Dreamliner plant there.") Segal says only the WTO has "threatened to provide any sort of meaningful check" on these subsidies.

He also singles out one of my favorite targets, the infamous and ludicrous state film tax incentive war:

Perhaps the most transparently absurd manifestation of war-between-the-states phenomenon is the case of the film tax credit ... [which] spurred the most precipitous race to the bottom I've witnessed in my time in politics. It came to a head in 2009, when Wisconsin had just spent $100,000 dollars to support Johnny Depp's personal grooming expenses and Connecticut was fixing to subsidize episodes of Jerry Springer's talk show — lots of broken chairs to pay for.  ... California's recent budget includes a half-billion in tax credits of its own ... to keep Hollywood from off-shoring to Manhattan, Indianapolis, and Santa Fe, which are offering bribes of their own. ... At least 42 states now provide incentives, with some exceeding 40% of production costs.

That battle is lost, I think, and state-to-state is only compounded internationally. Hello Quebec, I'm looking at you, boasting about your "most advantageous cash rebates available in North America"--with your 25 % cash-back on all expenses, your 20 % bonus on all CGI and Green screen shots and no minimum spend, no caps; you don't even have to release the film in Quebec. Paradise.

Segal's got the analysis right:

all that we're doing is paying people to move jobs to-and-fro, creating no new social value, and reducing net public benefit.

WHen you do that among the several states it seems merely silly; when you do it among countries, however, that's a bit of a different matter now isn't it.

He also explains the mechanisms of the film tax credit and concludes that

tax credits of this form are always a raw deal for the public, unless a substantial percentage of the credits go unclaimed: A full 25% or so of the subsidy is misfiring, going to middlemen and corporations with significant tax burdens. If you want to fund something efficiently, just fork over cash. (This, of course, could never be made to happen, since then the public would understand that all we're really doing is forking over cash to millionaires.)

Well said. More at the link.