Ducks and Economics

My friend Jon Sessions, a member of the Columbia School Board, recently published an essay defending the choice to declare Columbia “blighted” as part of the decision to designate much of the town an “Enhanced Economic Zone” (henceforth EEZ) under state law. Declaring Columbia an EEZ would allow the allocation of tax credits for “Businesses moving to the designated area or expanding within it can qualify for state income tax credits worth as much as two percent of payroll and property tax abatements worth half of the expanded or new facility.”

While the incentives would be “targeted at manufacturing firms”, “many other types of industries can qualify, including those focusing on arts, entertainment, recreation, information services, telecommunications and more”. However, “Retail businesses, gambling establishments, restaurants, educational services and religious organizations are not eligible.”

Is this in any way coherent? What is the justification for targeting “manufacturing firms” as opposed to retail businesses or restaurants? Why not target retail or restaurant establishments? In fact, why not just give everyone a tax credit? Certainly, that would stimulate employment as businesses looking to expand suddenly have extra cash to finance it with. Indeed, Sessions gives no warrant for targeting specific sectors and prioritizing certain kinds of employment and business above others. America is a country founded on the notion that everyone has equal opportunity to succeed; I propose we adhere to this notion by stimulating economic growth through broad-based changes in the tax policy, rather than by carving out special or protected industries that can’t survive on an equal playing field.

Moreover, the entire concept of competing for investment and growth through the use of targeted tax credits is fundamentally unsound. You often hear politicians or tax credit advocates argue that other cities and communities are offering this tax credit or that economic development program and if we don’t do that too we’ll miss out when companies come looking to expand. This “race to the bottom” mentality is corrosive, because it allows companies to pit city against city.

An economist might turn to auction theory to share some insight here. When cities look to attract investment and growth, they face a variety of choices, some good, some bad, some of uncertain value. Hence, there is a penalty when a city incorrectly decides a bad opportunity is in fact a good opportunity, and successfully offers a package of tax credits and incentives to chase that opportunity. Such overestimation is known as the “winner’s curse” and is on particular display on TV game shows like the Price is Right. While Sessions touts the assumed benefits of his strategy, he does not explain what happens when the city makes a bad decision, or why he thinks that the political nature of the decision-making process allows fair decisions.

Fundamentally, Sessions needs to articulate why he thinks Columbia’s “experts” in the government can always pick the right projects, offer the right packages, without making substantial mistakes. I challenge his implicit contention that policymakers can accurately gauge the future of economic growth, decide that they only want to promote certain industries, and decide what businesses should or should not succeed in Columbia. It would be better policy to keep a level playing field, and offer all people and businesses who wish to do business in Columbia a reduced tax burden.

Addendum: An astute reader notes this April 2010 post where I defend the school nutrition stance advocated by then-candidate Jon Sessions from a (very) spurious attack from Show-Me Institute policy analyst Sarah Brodsky.