Buzz Brockway over at Peach Pundit seems to think the recent announcement of Kia opening a manufacturing facility in Georgia is a good thing. Let's look at the key details of this recent news:
- The state of Georgia is giving $400 million to a large international company to subsidize its business.
- The Economist and the Wall Street Journal are skeptical as to the economic impact of the Mercedes plant in Vance, Alabama that cost the state $235 million.
's incentives have fueled pride and optimism in the state, it's hard to tell whether the state has gotten its money's worth. Alabama continues to suffer from serious economic and social woes. It ranks 43rd among U.S. states in per capita income, second-lowest in the percentage of adults that finish high school and worst in infant mortality. It has a tax structure that hits the poor disproportionately hard, and its state constitution, enacted in 1901 to reverse gains made by blacks after the Civil War, is a relic of the segregationist past. Alabama
Providing tax breaks for Mercedes and others cost"They are giving away something they don't have," says Matthew Murray, an economist at the
some of the resources it might have used to address these problems. For example, the state gave Mercedes a 20-year exemption from state income taxes, sacrificing revenue that could have helped upgrade schools or fund other programs. And when the company decided to double the size of its Vance plant, it got another $115 million in incentives. Alabama . At least some of the jobs brought in since Mercedes arrived probably would have come to the state anyway, he adds. Others say the money the state has spent on a handful of auto companies might have been better spent to attract companies in a variety of industries. Universityof Tennessee
- Economic incentives given by states are the furthest thing from free-market capitalism as one can get.
"...what government officials and company executives accomplished in the process of negotiating the deal was an expropriation of the property of Alabama taxpayers for corporate use. The government had essentially used its power to tax as a means to confiscate the property of taxpayers to provide Mercedes-Benz with numerous benefits."
- The primary goal of such incentive plans is to maximize state tax revenue, not economic growth.
Dwight Lee and Richard McKenzie in their book Quicksilver Capital claim that technological advances, starting in the 1980s, have allowed firms greater choice over locations. Firms compare corporate and property tax rates of various states to decide where to locate.
If true, this would generate tax competition between states. Firms will locate in one state over another to take advantage of the tax differential. The process of competition in the market place would place constraints on the taxing power of state governments. We might even see declining tax rates at both the corporate and personal level.
Alas, marginal tax rates among the states are not declining. Instead, we see competition among state development agencies not to lower taxes to all firms and encourage economic growth, but to offer direct support or direct financial incentives to selected firms. This is called "industry targeting," and anecdotal evidence suggests it can be effective in attracting investment. State officials claim that the government's objective is economic growth. However, state government officials act for their own benefit, and the bureaucratic motivation for using direct financial incentives is something other than enhancing state economic growth. State governments want to maximize their tax revenue.