Race to the Bottom

Dan GundersenDan Gundersen, Upstate chairman of the Empire State Development Corporation, came to the Buffalo Niagara Partnership today to discuss state incentives to businesses, and how we compete for that business with other states.

In a nutshell:

  • Business incentives have become an entitlement, not an incentive. Businesses not given an incentive package to come to New York (or any other state, for that matter) will generally choose to go to some region offering an incentive package.
  • Because New York has real estate taxes 50% higher than the national average it must offer incentives to lure businesses to the state. The problem is that incentives are being offered by every state, regardless of where they rank tax-wise. The conclusion: Offering incentives rarely provides New York an edge over other states.

This is the classic race to the bottom. As each state tries to outdo every other state the logical conclusion is that businesses will eventually be incentivized (read: entitled) to locate to the region that offers shovel-ready or spec-built real-estate essentially for free – no taxes, ever. People who are lured to that region for the jobs it produces may be burdened with taxes, but not the businesses providing those jobs.

Given that our current system of taxation is plainly not working well, New York State might be wise to grab the lead on this and offer a free ride to any company willing to relocate to the state – especially to the upstate area.

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2 Responses to Race to the Bottom

  1. At first, it seems that the problem you’ve identified seems to be one without a solution, but if we follow your suggestion to the logical conclusion, all 50 states will offer free taxes to all businesses.

    My question is why a race to the bottom hasn’t occurred with state income taxes or state sales taxes. Of the several states that have no income taxes at all (Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming), none seem particularly desperate for workers, and of those with no sales tax (Alaska, Delaware, Montana, New Hampshire, Oregon), none seem particularly desperate for buyers of consumer goods. Maybe I’m wrong, but those states don’t seem to have dropped their taxes as a lure to bring people in from other states (well, maybe Alaska), but rather have dropped those forms of taxes out of ideological, not economical, motivation. What do you think?

  2. Paul says:

    I believe that in the future, the threat of corporations moving to states with little or no tax burden will drive virtually all states (NY will probably be an exception) to reduce state corporate taxes. The tax burden will eventually fall almost exclusively on the people who live there. In a Machiavellian sort of way, this may not be such a bad thing, because if the voters get a taste of what their state’s true tax burden is, perhaps they’ll consider who they vote for a little more carefully.

    The race to the bottom is over yet, but it has started as tax incentives of all kinds are being instituted to lure targeted industries. North Carolina has been using incentives for years in an attempt to replace their once booming textile industry; Tennessee did it to lure the automakers, and now ranks 48th out of 50th in overall tax burden. California companies located near the Nevada border are moving to Nevada, lured by a tax rank in the bottom third nationally (as compared to California’s 12th place ranking).

    I can’t determine if it was ideological reasoning or reasoning based on economic theory that has driven some states to reduce their tax burden, but since 2000, five states have made dramatic drops and are now considered low-tax states: Georgia, North Dakota, Utah, Idaho, and New Mexico. I made a note to research this and I promise to blog about it in the future if I find any interesting trends.

    Having said all this, you get what you pay for. I suspect on average, the educational, judicial, public health and other state-funded systems in those states with the lowest tax rates probably do not provide as much as those states with higher tax rates.

    We could research this for days and still not come to many solid conclusions about the real effect that taxes have on business (re)location. I do think, though, that the combination of over-regulation and high taxes is a major reason why businesses fled New York.

    Thank you for your comment.

    BBD

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