How to Burden Taxpayers and Ohio’s Economy

Cleveland Plain Dealer - February 21, 2006

by Zach Schiller, in The Cleveland Plain Dealer 

In a bid to retain auto jobs, the Ohio Legislature is considering a new tax incentive that would reward major automotive employers even if they slash their work forces.

Worried Michigan already has approved a new incentive of its own. These are just the latest examples of a damaging competition between states.

Such incentives are unlikely to be crucial in keeping or generating new jobs, while they increase the burden on taxpayers and sap state revenue for the investment in education and infrastructure that really helps develop strong economies.

On March 1, the U.S. Supreme Court will hear a case that could diminish this destructive war between the states and change how Ohio and other states encourage economic development.

The court will hear an appeal of a ruling by the Cincinnati federal appeals court, which found unconstitutional the investment tax credit Ohio gave to DaimlerChrysler for a new Jeep plant in Toledo. The appeals court decided that the tax credit interfered with interstate commerce by allowing companies that locate plants in Ohio to pay lower taxes than those locating elsewhere.

Unfortunately, giveaways like those in the Chrysler case have multiplied as companies have become skilled at pitting states against one another. Yet they are at most a modest factor in most corporate location decisions, since state and local taxes are a very small part of business costs.

For example, a 2004 study by Yoonsoo Lee, a researcher at the Federal Reserve Bank of Cleveland, found “very weak evidence of the role of tax and financial incentives in explaining the patterns of plant relocations.” Incentives amount to a zero-sum game, because they do little to increase the overall number of U.S. jobs.

Some have pegged the cost of these subsidies nationally at up to $50 billion a year. The Ohio credit under review cost $87 million in 2004. As unlikely as they usually are to produce jobs, such tax breaks are costly
to real economic development.

For instance, these funds could be used to make college affordable for more Ohioans, an important element in improving the state’s economy. Likewise, they could help ensure that Ohioans from school districts rich and poor were equally able to educate their pupils.

The best answer officials can give on why they offer these incentives is: Everybody else does it, so I do, too.

Certainly, it’s been unsuccessful in Ohio, where the number of jobs is now where it was in 1997 and incomes for most workers have stagnated.

Nor has it worked in Michigan. These two states have been hit harder than others because they are dependent on manufacturing, and the auto industry in particular.

Yet each is busy adopting more tax breaks in bids to maintain their auto jobs. In December, Michigan enacted a law that would give tax breaks to companies that shut down operations in other states and move them to Michigan.

The Ohio General Assembly, meanwhile, is considering a bill that would allow the state’s biggest automotive employers to save tens of millions of dollars a year. Honda could qualify by doing no more than it does anyway; General Motors, Ford or Delphi could ship thousands of jobs out of state and still benefit.

This raises the ironic possibility that a company could move operations from Ohio to Michigan and get tax breaks in both places (some jobs would have to stay in Ohio, but only half of those at a given plant).

Meanwhile, both states would lose vital revenue that could be used to educate their citizens, pave their roads, and support their local libraries, police and fire departments.

This is the cockeyed logic that our current race to the bottom has created – and that the Supreme Court is in a position to help correct.

A ruling upholding the decision would not keep states from encouraging economic development. They could still offer grants, build infrastructure, support worker training, or, if they chose, overhaul their tax systems, as Ohio ironically has just done.

The Supreme Court repeatedly has used the commerce clause to strike down state schemes that privilege in-state businesses. In fact, the U.S. Constitution originated in part as an attempt to end such discriminatory
conduct by the states.

Unfortunately, however, elected officials on both sides of the aisle are supporting this failed incentives strategy. Ohio Sen. George Voinovich is leading an effort in Congress to overturn the decision.

If the court rules, as it should, that such tax breaks are unconstitutional, Congress should respect its conclusion.

Schiller is research director at Policy Matters Ohio, a nonprofit research institute based in Cleveland.

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