To grant tax incentives or not to grant tax incentives? It is not exactly William Shakespeare’s question, but a case before the U.S. Supreme Court is, for state governments, almost as significant as the playwright’s ageless existential dilemma.
The court has announced that it will hear an appeal of the ruling of the 6th Circuit Court of Appeals in DaimlerChrysler v. Cuno. The lower court had found that Ohio’s machinery- and equipment-investment tax credit — a program of tax breaks and incentives similar to what many states offer to attract investment and jobs — is unconstitutional.
The suit had been brought by two groups: Ohio taxpayers who said that state bidding wars to offer tax credits to lure big employers and other development had gotten out of hand, with taxpayers’ footing the bill; and Michigan taxpayers who said that the credit prevented DaimlerChrysler from opening an auto plant in their state.
The appeals court found that the tax credits unconstitutionally interfered with interstate commerce, by placing an unfair burden on economic activity outside of Ohio.
Rhode Island is not subject to the rulings of the 6th Circuit, but we support the Supreme Court’s decision to review the case, so that there will be one set of rules for all regions. In the spirit of that level playing field, we hope the high court will uphold the ruling against these types of tax credits.
It might seem surprising that the director of the Rhode Island Economic Development Corporation would be arguing against tax incentives, since bringing employers to Rhode Island and strengthening the state’s tax base are of paramount importance to me. Yet when I step back and look at the bigger picture, it is clear that tax incentives of this type are bad policy in the long run.
For one thing, tax credits don’t really create new jobs; they merely help apportion them. They may make the difference in a company’s decision of where to open a plant, make an investment, or expand operations, but though in one instance that might mean more jobs for Ohio — or even Rhode Island — it comes at the expense of investment in another area. It’s practically a zero-sum game, in which a gain for one state means a loss for another.
In this increasingly interconnected world, we’re all in this together. We should be pursuing policies that create more net jobs in the United States, rather than fighting among ourselves for slices of a static pie.
So how do we create more jobs? For that we need policies that are further-reaching than tax credits offered just to this company or that. We need to reform and streamline our tax codes, to make the state environment more business-friendly, removing burdens to innovation and investment. Businesses will invest not just because one state or another offers them a better package of discounts, but because the overall business and tax environment in those areas is conducive to investment.
Furthermore, the kind of tax break at issue in the Cuno case ultimately means less tax revenue for the state. That eventually comes back to hurt us, by impairing our ability to fund education, infrastructure improvements, valuable social services, worker retraining, and other public services that not only make a state an attractive place to live, work and run a business, but also make a vital contribution to a healthy state economy — and to sustainable economic growth for the long term.
Corporations are savvy negotiators; they know they can pit one state against another to get the best possible deal. But as the Center on Budget and Policy Priorities has noted, it’s hard to see why states should be encouraged to give away their limited tax bases so that, in effect, they can steal jobs from their neighbor states. And as long as some states are offering credits, leaders in other states feel compelled to come up with something similar, rather than face the charge that they didn’t do enough to bring jobs home.
Clearly, job creation is a major priority for the State of Rhode Island, as it is for every part of our country. Since Governor Carcieri came into office, the state has grown by approximately 15,000 jobs. Instead of cannibalizing our neighbor states, however, we should be cooperating with them in regional job-creation efforts that bring economic development and benefits to the entire area.
Rhode Island is proving itself to be a hotbed of innovation. Why? Because our academic institutions, small businesses, larger employers, and government are forming new types of alliances and highlighting the ability to test new strategies, business models and technologies here in the Ocean State.
Recently, Rhode Island received numerous grants — totaling in the millions of dollars — from federal agencies to explore innovative new approaches to medical research, environmental clean-up and homeland defense (to name a few). The Business Innovation Factory was created, and is capturing the imagination of such leading companies as IBM and Lucent, as well as bringing the nation’s leaders to Rhode Island to discuss the role of innovation in businesses. These activities have been able to occur here because of a renewed sense of identity, based on our state’s ability to be accessible on all levels, and removing barriers that exist in other geographic locations.
The real question for the state’s citizens to ask themselves is: In what ways can we work together, rather than compete, to create new opportunities for companies to expand, and receive foreign direct investment?
Rhode Island is the model for the rest of the nation on successful collaboration. We are showing — beyond a tax credit or an incentive — the ability to achieve success in a global marketplace. While tax incentives may come and go, the ability to successfully innovate should remain a constant priority.
Michael McMahon is executive director of the Rhode Island Economic Development Corporation.